Unlock the secrets to saving for a house deposit with our comprehensive guide. Discover practical strategies, expert insights and tailor your path to homeownership amidst NZ's unique market conditions.
Updated 9 November 2023
Summary:
- Buying a house is one of the biggest financial commitments you can make in your lifetime. However, saving for a house deposit in New Zealand can be daunting, particularly for first-time buyers given the 10% to 20% deposit requirements, ever-changing house prices and long-term high cost of living.
- Add in strict lending policies,growing unemployment and supressed wages and saving enough money for a sufficient deposit can be challenging.
Know This First: Why is saving for a house deposit in New Zealand so hard?
- The blistering pace of house price growth during 2020 and 2021 has led to higher deposits beingrequired on the same properties, although some properties have dropped in value.
- With the cost of living crisis and rising food costs,many Kiwis will have less disposable income to contribute towards mortgage payments. Additionally, the RBNZ's OCR increasesto fight inflation mean that banks require more income to service the same mortgage debt.
- All of the above has caused significant stress and uncertainty for Kiwis, especially those that have been diligently saving for years for a house deposit. With rampant inflation and rising costs coupled with companies starting to lay off staff, getting onto the property ladder has never been tougher. However, home ownership has been a core tenet of being a Kiwi for decades, and some will still want to invest in this economic climate.
To help you plan and save with confidence, our guide covers:
- What are the Best Ways to Save up for a House Deposit?
- Understanding the Opportunity Costs of Saving for a House Deposit
- Must-Know Facts about Saving for a House Deposit
- Frequently Asked Questions
Know This First: Basic Concepts and Definitions to Understand Regarding House Deposits
Before you begin saving for a house deposit, it's crucial to understand the requirements. We’ve detailed the top three concepts you should understand before saving up for a house deposit:
- Minimum Required Deposit Amounts: Generally, lenders in New Zealand require a minimum deposit of 20% of the property's purchase price (unless you qualify for a low equity mortgage - LEM for short). For instance, if you're buying a house worth $1,000,000, you'll need to save at least $200,000 as a deposit. If you have a smaller deposit, you may still be able to purchase a home through various government schemes. However, it will depend on the lender's policies and constraints placed on them by the RBNZ.
- Interest Rates: Interest rates can significantly impact the cost of your mortgage. Generally, the higher interest rates are in New Zealand (through the RBNZ’s OCR), the higher your mortgage interest payments will be.
- Mortgage Affordability and Stress-Testing: Before approving your mortgage application, banks will test your income and financial ability to meet mortgage payments at a higher interest rate than what you can currently take out a mortgage for. This "stress test" ensures that if interest rates rise after you take out your mortgage, the bank can be sure you can afford the increased mortgage repayments before committing to a mortgage. Banks generally include all factors, including insurance, rates, and ongoing maintenance.
MoneyHub Founder Christopher Walsh explains the hard facts of saving for a house deposit:
"Saving for a house deposit is much more than a financial challenge; it's a testament to one's resolve and adaptability. Unless you are offered the 'bank of Mum and Dad', the path to homeownership is steep, marked by fluctuating house prices, the ever-tightening grip of living costs, and lending criteria that aren't transparent. But please don't be deterred - it's a process worth the sacrifice. In the face of these realities, resilience is key. It's about the small, consistent efforts that, over time, build the foundations of your future home. Secondly, it's about strategy. Increasing your income is not merely a wishful ambition - it's an actionable goal. Whether through upskilling, side hustles, or savvy investments, every additional dollar earned is a brick laid on the path to your front door. Trimming the fat on expenses requires a discerning eye and an unyielding commitment to your long-term vision. The occasional indulgence is human, but a structured budget is divine, especially when every saved penny is a step closer to your dream. Remember, growing your savings isn't just about stockpiling cash; it's about nurturing it to flourish through wise investments, even if it means weathering the storms of market volatility. Your future home is not just a shelter; it's a financial bastion that requires solid groundwork. Let's be clear - unless you get a windfall, this journey has no shortcuts. The current financial landscape in New Zealand demands a blend of sacrifice and shrewdness. It's about balancing life's pleasures with the gratification of long-term security. Many people grow frustrated or resentful - don't compare yourself to anyone; just make a plan and follow it. New Zealand is uniquely a country where homeownership has become a national obsession. This guide is published to help you make it a reality for you". |
Christopher Walsh |
What are the Best Ways to Save up for a House Deposit?
Saving for a house deposit can be a challenging task, but there are some ways to make it faster and more efficient:
1.Increasing Your Income
- Increasing your income is another way to save for a house deposit. Consider taking on extra work, starting a side hustle, or making money online. You can also consider renting a spare room in your home or becoming an Uber driver. Look for opportunities to earn extra money that align with your skills and interests.
- Generally, increasing your income is the more sustainable long-term way to save up for a deposit faster, as your earning potential is theoretically uncapped. In contrast, while learning to be frugal is essential, you can only theoretically cut your expenses to zero. Therefore, focusing on increasing income can pay off far more in the long term than trying to cut your expenses down to the bone.
2. Reduce Your Expenses.
- Assessing your current finances is key to crafting a path towards saving for a house deposit. Start by creating a budget that tracks your income and expenses. When you're saving for a house deposit, it's important to prioritise your spending. Identify your essential expenses, such as rent or mortgage payments, utilities, and groceries, and prioritise those expenses over non-essential expenses.
- Next, once you've assessed your current finances and identified your essential spending, you'll need to cut non-essential costs wherever possible to save up for a house deposit faster. Finding ways to cut costs can help you save more money for your house deposit. Look for ways to reduce your living expenses, such as switching to a cheaper phone or internet plan, buying groceries in bulk, cooking at home versus going to restaurants or carpooling to work. Consider downsizing your living space or renting out a room in your home to increase your income and reduce your living costs.
3. Increase Your Savings Rate.
- Once you've assessed your finances, it's time to create a savings plan. First, determine how much you need to save and how long it will take to achieve your goal. For instance, if you save $100,000 for a house deposit and plan to buy a house in five years, you'll need to save $20,000 per year or around$384 per week.
- You can further break down your savings goal by setting monthly or weekly targets to help you stay on track. In addition, setting up automatic transfers from your checking account to your savings account can help ensure you're consistently saving. By setting a savings target, you’ll be far more motivated to continue trying to increase your savings rate over time.
4, Grow Your Capital.
- After you've set initiatives to increase your income, reduce your expenses and increase your savings rate, the last step to try and save up for a house deposit faster is to optimise your investments to maximise your expected returns.
- Whether this involves being more aggressive in your investment strategy, looking for higher rates of return on things like term deposits/savings accounts or shifting to a higher allocation in equities, the faster you can grow your capital, the faster you can reach your target house deposit amount.
Understanding the Opportunity Costs of Saving for a House Deposit
Unfortunately, saving up for a house deposit will require sacrifices in the form of opportunity costs. Opportunity costs are the benefits or opportunities you give up when choosing one option over another. This is the cost of saving - unless you have a generous cash gift coming, it can be a struggle and you miss out on things as a result.
Some of the most common opportunity costs you give up when you put aside money for a house deposit include:
1. Quality experiences
Saving for a house deposit faster requires discipline and may mean giving up some discretionary spending, such as eating out or travelling. This can lead to a feeling of delayed gratification, as you must forgo some of the immediate pleasures of life that you otherwise would have taken if you didn't save for a house deposit just to get onto the property ladder.
2.Missed investment opportunities
When you buy your home and put all your savings into a house deposit, you won't be able to put that money towards investment opportunities that could offer higher returns (such as equities or a business venture). While these investments always carry their unique risks, they also offer the potential for higher returns so it’s important to recognise this trade-off when you buy a house.
3. The opportunity cost of time
Saving for a house deposit may require working extra hours, taking on a second job or spending less time on leisure and more time negotiating mortgages or working out how big of a mortgage you can afford. This additional time sink can increase the stress you experience and ultimately hurt your quality of life (as you may miss out on valuable time with friends and family or spend less time pursuing hobbies).
4. Inflation
The longer it takes to save for a house deposit, the more likely inflation will erode the value of your house deposit savings. The longer it takes to save up for a house deposit, the more you may need to save than anticipated to keep up with cost inflation (and potentially rising house prices).
Must-Know Facts about Saving for a House Deposit
1. Try to set realistic goals
- Saving for a house deposit takes time and dedication. Setting realistic goals is crucial when saving for a house deposit to ensure you stick to the plan and don't get demoralised. Consider your current financial situation, how much you can save each month, and how long it will take to achieve your savings goal.
- Be realistic about your timeline and your ability to save, and adjust your goals as necessary to keep yourself motivated. Accept that you might not be able to save the same amount every month and that as long as you're roughly on the right path, you'll eventually save enough for your house deposit. Good things take time.
2. Negotiating your mortgage can reduce the amount of deposit you’ll need
- Negotiating your mortgage can help you get the best deal possible when buying a home. A mortgage broker can shop for the best mortgage rates and terms and will negotiate with lenders.
3. The less pricey the property, the less of a deposit you’ll need
- Generally, the smaller the property and the less popular the city, the lower the house price (and the less house deposit you'll need. When saving for a house deposit, exploring alternative home ownership options (which can reduce the house deposit you'll need) is important.
- First, consider what type of home you want to buy, whether a house, townhouse, or apartment. Next, think about the location you want to live in, the size of the property you need, and the features you're looking for.
4. Focus on affordability
Just having a 20% house deposit isn’t enough - you’ll also be stress tested to get approved for a mortgage, as this Stuff.co.nz article outlines. Having a deposit is only one part of the test - you need to be able to afford the repayments.
While some of the above tips may help, you'll ultimately need to spend many years diligently saving.
Unless you've got access to the "bank of mum and dad" to help out with a few hundred thousand, it's unlikely you'll be able to save a 20% deposit ($400k) on a $2 million property to buy a standalone house in Auckland from only saving for a few years. The only realistic way to save up for a house deposit faster is to boost income or austerity (drastically cutting costs) substantially. Unfortunately, with the current financial dynamics in New Zealand, this is the reality for many Kiwis. Sacrificing short-term pleasures for long-term financial security is tough but necessary.
Frequently Asked Questions
How long does saving for a house deposit take?
The amount of time it takes to save for a house deposit in New Zealand depends on your current financial situation, including:
- Your income
- How much can you save each month
- How much you already have set aside as a deposit
- Whether you’re eligible for a lower deposit amount
It usually takes Kiwis five to ten years to save for a house deposit in New Zealand. If you're on a higher income, save more of your take-home pay each month or have initial cash set aside already, it'll be faster. If you don't have these things, it might take you longer.
Should I use a mortgage broker to help me find a home loan?
Using a mortgage broker can be a good idea when you're looking for a home loan and want someone to manage the process without you having to go to each bank. A mortgage broker can help you navigate the application process, compare rates and fees from different lenders, and find the best deal for your needs.
Generally, mortgage brokers can offer discounted rates that might not be available to the general public. However, make sure you check what fees the mortgage broker intends to charge you - most mortgage brokers will either get a referral fee from the bank they connect you with or will charge fees for their services (which can be significantly more costly to you than initially proposed).
I'm a young professional a few years into my career and currently renting. With the cost of living increasing, I'm finding it hard to save money for things like a first home deposit. I'm incredibly pessimistic that I'll ever be able to afford a home. Is there any hope for me? What can I do?
Firstly, it’s important to acknowledge how hard it is for someone in your situation. The current economic climate has made it almost impossible for many young Kiwis to get a foothold on the property ladder. With wages stagnant for decades and home prices soaring, it’s completely reasonable to respond in the way you have.
It's challenging for young Kiwis or working professionals to save for a home deposit, especially with the increasing cost of living. However, there are several strategies and resources that you can utilise to improve your chances of owning a home. Here are some suggestions:
- Consider a more affordable location: Research areas where property prices are lower, and consider moving to a more affordable location if it is feasible for your work and lifestyle. You might also want to explore purchasing property in smaller towns or on the outskirts of major cities.
- Reduce or consolidate debt: Pay off any high-interest debt, such as personal loans or credit cards, as this will improve your credit score and increase your borrowing capacity. You can also consider consolidating your debts into one low-interest loan to make it easier to manage your repayments.
- Consider co-buying: Pooling resources with a friend or family member can make buying a property more attainable. However, ensure a legal agreement to protect both parties' interests.
- Be patient and persistent: Saving for a home deposit will take time. Remember that you’re young and have many years ahead of you to save up. The most important thing is to stay committed to your goal and not be discouraged by other people or factors.
How does KiwiSaver apply to a House deposit?
KiwiSaver is a government-run savings initiative to help New Zealanders save for retirement. You can use KiwiSaver to help you save for a house deposit. If you've been a member of KiwiSaver for at least three years, you may be eligible to withdraw your contributions and any employer contributions and government contributions to put toward a house deposit.
Additionally, some first-time buyers contributing to KiwiSaver for at least three years may be eligible for a HomeStart grant of up to $10,000 (or up to $20,000 for a new build). Finally, check your eligibility for government schemes like the First Home Grant or the First Home Loan. These can provide extra support to help you buy your first home.
Other Relevant Guides:
- High Deposit (High Equity) Mortgages
- Low Deposit Home Loans
- First Home Loans (5% Deposit Mortgages Underwritten by Kāinga Ora)
- Best Home Loans
- Investment Property Mortgages
- How Much Can I Borrow for a Mortgage Calculator
