Woohoo - you’ve got your deposit! Perhaps you’ve been saving your average income with a partner for 4 or so years (at a rate of 20% this would give you a deposit of $76,449*). However you arrived, well done! And now to truly test what is affordable for you to buy.
There’s a lot of talk - as always - about how affordable housing is for Kiwis in this current era. Economist Shamubeel Eaqub has crunched the numbers and not surprisingly found that in fact since 2008 the average New Zealand house price has risen back above six times the annual household income*. With the generally recognised definition for an affordable house being just three times income (Hugh Pavletich, co-author of the annual Demographia International Housing Study), it’s a sobering fact.
The silver lining is of course, mortgage rates. Housing affordability and mortgage affordability are two different propositions. Right now, mortgage rates are low and this is obviously in your favour. But how do you factor in the possible rate hikes, costs of home ownership (like insurance), renovation costs, risks of job loss… all while taking advantage of your purchasing power to buy your very own castle - an asset which has the potential to gain significant value over time, especially if you buy really well? You want to stretch yourself and buy the best you can, but not do it in a way that makes it impossible to breathe right?
As you are already probably aware, the amount you borrow depends on some simple facts - your current income, and the percentage a lender will lend on a property. Lenders want to be sure - for their sake and yours - that you’ll still be able to live once your payments are made. Every lender has its own set of criteria to calculate what they will allow you to borrow.
For some they need to calculate your ‘UMI’ which is an uncommitted monthly income or surplus to all of your basic costs and expenditures. This could be as much as $1000 a month. Some will allow for potential flatmates contributions to your expenses and some won’t. These are just a few small differences. This is where an experienced mortgage broker can break it all down, approach the right institutions for YOUR specific situation, and provide calculations you can make informed decisions on.
On their own, mortgage payments are considered “affordable” when they take up no more than 40% of take home pay. Some experts say that all of your combined fixed payments should not exceed 30-40% of your income. This would include student loans, car payments, hire purchases as well as your mortgage. However there are other more conservative advisors who draw the line at your mortgage being above 25% of your take home pay (and want you to get that paid off in 15 years, not 25 or 30!).
Simple mortgage calculator tools are great, but to really move forward with your first home goal, you need to be able to make an informed decision based on the facts of your situation, potential risks and your goals.
As a mortgage broker who gets it, I am always available for help, advice, and crunching YOUR numbers, to help get you where you want to be.
Don’t hesitate to call - I’m right here: Hayden (The Finance Marshall)