As New Zealand’s average rental prices continue to heighten to some of the most expensive seen, first home buyers looking to enter the market are faced with an important decision; Is it more beneficial to rent long term and face the high rental prices whilst saving? Or is it more advantageous to take on a home loan and pay it off while interest rates are low?
At present, people can secure a fixed five-year interest rate under 5% per annum and at present the Reserve Bank has the official cash rate (OCR) on hold at 1.75% until late 2020.
According to the January 2019 rental price index report, rental costs nationwide have continued to increase over each of the given time periods:
In the last quarter of 2018, the average weekly rent in New Zealand for a standard three-bedroom home was $421. This is a 5.1% rise since the same time last year ($401 weekly).
During 2018, Wellington rental prices have gone up 7.9%, Hamilton’s rose 6.2% and both Christchurch and Tauranga’s are now exceeding 4%.
Source: Core Logic NZ and MBIE.
Wellington’s central suburbs three-bedroom home average is currently situated at $640 per week and Auckland central averages $695 weekly rent.
In order to get out of the rental market and away from the increasing costs, people tend to rush into purchasing their first homes. First home buyers accounted for 31% of property buyers in Wellington during 2018
The decision to purchase a first home is not a task to be taken lightly or rushed into; the process takes a lot of time and planning in order to achieve an end goal. Purchasing your first home requires a solid amount of personal savings to be set aside in order to make the initial deposit and obtain lending from the bank. Saving schemes such as KiwiSaver and ‘gifts’ of money from family are able to be used for the 20% deposit. However, a steady personal savings is the most definite way to secure higher lending from the bank and show positive spending habits.
For example, a couple who is paying $500 per week in rent and putting $0 into a savings account would be seen as only being able to make the equivalent $500 weekly loan repayments resulting in a mortgage of only $350,000. However, if a couple is spending $500 on rent per week and putting a further $300 into a savings account the bank can see an ability to make repayments of $800 weekly. The later will, therefore, have a higher borrowing capacity of circa $500,000. If you are looking at making the step to purchase your first home, remember the more money that you can prove you can save each week, the more the bank may be willing to lend you.
In a report completed by interest.co.nz, they claimed that as of November 2018, the average weekly mortgage payment of a lower quartile house price was $353.28. This weekly average is based off a house price of $386,000 with a two-year fixed mortgage rate of 4.25%pa.
It is to be noted however that the average house price in Wellington in December 2018 was $688,074 and $1,048,145 for Auckland. Using the same above assumptions including a 20% deposit you would be looking at mortgage repayments of approximately $624.49 per week for Wellington and $951.28 per week for Auckland.
This means that in an ideal circumstance (excluding the benefits of capital gain in the property value), it could be more beneficial to own your residence with a home loan than choosing to rent long-term.
It is key to remember that the goals and preferences people want to happen may not align with what they have the financial liberty to achieve. It is important to remain flexible when it comes to options associated with large financial decisions such as purchasing property.
During this process, seeking advice from those with financial intelligence on the subject may help in deciding which route is best for your situation. Gaining professional advice that not only aligns with your goals but also takes into consideration every aspect of your current and future situations can emphasise the path which may be more beneficial for your financial success.
If you are looking to enter the housing market or obtain mortgage advice, get in touch with our team today by booking a complementary mortgage meeting with our in-house mortgage broker and Authorised Financial Adviser, Brayden Judd.
He will assess your current borrowing situation/potential and at the same time ensure you experience happiness in wealth.
He can also help you put together a plan to save for that first home deposit which is for many people the biggest hurdle of purchasing their first home. With house prices increasing so too has the deposit required.