Q&A: Saving for a deposit to buy a home

• How to start the saving process
• How to budget and stay on track
• How to be smart with your savings
• How to get help with your house deposit

Mortgage adviser, Mikey Smith, Managing Director, Guardian Smith and enable.me founder and financial adviser, Hannah McQueen help us with some key questions.

Hannah: The main way to genuinely make it something you can’t touch is to put it into KiwiSaver. And in some cases that’s fine but it isn’t always the best way when it’s savings over and above what your employer will match. I would suggest that you set up a system that automates your savings so it comes out of your account as soon as your pay comes in, before you have a chance to spend it. Then, put it into an account or fund which penalises you for making withdrawals. This will help reduce the temptation to touch it. Do not, under any circumstances, have EFTPOS access to the account.

Mikey: Budgeting may sound boring but it’s the key to success. Make steady, disciplined savings and work out your budget with the tools on the www.keepthechange.co.nz website. Then set up automatic payments. Sometimes, it’s a good idea to ask a family member to have a savings account for you - out of sight, out of mind. We’ve seen people save 30-40% of their incomes, it’s a commitment.

Hannah: You need to have a budget, a goal and a system to help automate the outcome, a deadline, and, ideally some accountability. A budget is key, or your savings goal could be completely unachievable which will kill your motivation. Or it could be blown off course by the first unexpected expense.

And do set a goal. Even if the goalposts shift, you’ll be much further away from it if you don’t try. I’d suggest breaking down the goal into milestones so it’s not just the end goal but what you can achieve this quarter or this year. That way, you have milestones to celebrate along the way, which is motivating. Even if the goalposts were to shift, it doesn’t mean you won’t achieve it, it may just mean we need to spend another three months trying. At the moment the goal posts aren’t getting further away so it’s a great time to go hard!

Mikey: I think big savings goals can be intimidating. Better to break the year down into four quarters and target a set amount per quarter. Saving is hard but when you budget correctly, and make an agreement with yourself about wanting a home, you’ll start to make progress. We see people save 30% to 40% of their incomes. It’s a commitment. Think about where you live. Can you rent more cheaply? Is your fancy car really needed? Is your $6 a day coffee really a requirement? I rented a full house and then rented out the rooms individually and ended up with very low rent costs for myself.

Hannah: Your timeframe is important when considering how best to put those funds to work. The closer you are to buying, the more cautious you have to be about risking those hard-earned savings, as you don’t have the time to recover from a downturn in the market. So, you could look to invest them in a managed fund, but generally, if you’re within a few years of buying, you’re best in a conservative fund or even cash, as the most important thing is certainty about how much cash you have to contribute. The last thing you want is to find out is that, come settlement, you’re short because your shares have taken a dive.

Mikey: Well, the boring old term deposit has made a roaring comeback this year. Everywhere you look – housing, shares and bonds, is a mess. For basic savings and low risk returns, the 5% term deposits are starting to look quite attractive for people. The days of going all-in on Tesla stocks seem to be behind us, so be careful and get good financial advice.

Hannah: There are a number of ways parents can help, depending on whether they’re giving or lending, and whether it’s cash or equity they’re contributing. The cleanest and easiest way is cash, but I usually encourage the parents to make sure they’re OK for their retirement before handing over cash. If they’re not, then perhaps they could be an investor in your property, so it helps you get over the deposit hump but it will also help them with their retirement. I also advise parents to consider the impact of a relationship breakdown, as usually they don’t want to see their contribution halved. In that circumstance they often document their help as a loan, which means they could require payment of that loan in the event of the relationship failing.

Mikey: There are a few ways people do this. As a straight gift from your parents, they can transfer the funds with a gift letter provided, stating that it isn’t a loan and the kids can have it for a house purchase.

Another example we see is a Deed of Acknowledgment of Debt. This is a legal document that says the kids can have the money but the parents ask for it back when the house is sold after the bank’s mortgage has been repaid. This works quite well for parents as it allows them to keep an interest in the funds. If anything goes wrong relationship-wise when the property is sold, they can get their money back. Take independent legal advice on this and the wording, which has to be correct.

The third option isn’t so much a gift for the deposit, but rather the parents act as guarantor. This is where the parents offer up their home as security to the new bank. The kids may have a 10% deposit and need 20%. When the parents become a guarantor, the kids borrow 90%, but the bank knows there’s more equity available if anything were to go wrong. This is less popular than it was.

Mikey: This is a hard one, it’s a very individual question. Averages don’t work because all of us have different things going on in life and we’re at different stages. Say you’re a couple. If each person has $85,000 incomes, after tax and KiwiSaver, you’re left with about $2,392 per week. After rent of $600 per week, and grocery costs of $450, you are left with $1,342. You should be able to save $900 a week from this which equates to $46,800 per year. You will have a home deposit in two years. It’s not impossible. We see clients do this more often than people believe. And then you have your KiwiSaver growing in the background.

Mikey: This is very market condition dependent. We’d all like to own homes that are 3.5 times our incomes but in the peak craziness, we regularly saw people buying for 10 times their incomes. It’s about talking with your mortgage adviser and working through what you’d be comfortable with as repayments and costs. If you focus on this “multiple of income” idea, you’ll be looking for a very long time. Focus on your financial position and what suits you.

Mikey: All banks are restricted in how much lending they can do to people with a lower than 20% deposit due to the capital requirement regulations to banks from the Reserve Bank. From time to time, we see banks open up to 10% deposit buyers on existing homes. Note, any new build property is granted an exemption from this rule and can be purchased with a 10% deposit.

Mikey: If you haven’t owned a home before you’re eligible for withdrawal from KiwiSaver at any age. You can use all of your KiwiSaver towards your deposit apart from $1000 which must stay in the fund. You have to have contributed to KiwiSaver for three years.

Mikey: Yes, having a flatmate is effectively more income, therefore it increases your borrowing capacity. Mortgage applications are made up of two set pieces: the deposit requirement and the income requirement. They are different and separate from each other so adding a boarder or flatmate will have no effect on how much deposit you need but if you can meet the deposit requirements, then it will help you borrow a higher amount.