Letters to ‘Sarah’
If you’re desperately looking at getting into the property market (or know someone who is) but need to get a few things sorted before the banks are willing to give your application the big tick the following might just help clear things up,
Okay, I confess in this day and age it was actually a Message on Facebook (not a letter) that I received, anyhow her message stood out to me a great deal. I could really sense her uncertainty, misunderstanding and probably even desperation in her voice? Can You?
I want to share our conversation with you because I feel like a lot of us are in a similar boat or chances are you’ll know others who will definitely benefit from this – if so please fwd this on to them.
“Sarah: Hi Matt,
My partner and I would love to get into the property market here in Auckland but as with a lot of others we don’t have a deposit saved, we have instead been paying our debt off as fast as we can. It’s a bit of a frustrating situation to be in. Are there any other options for us?
We haven’t yet been with KiwiSaver for three years (about 6 months off), although I don’t think it matters as our incomes combined are over the $120,000 threshold and we don’t really want family to help. Any advice is appreciated.
Matt: Hi Sarah,
It’s interesting you talk about the income threshold with KiwiSaver for first home buyers. This is something a lot of people get confused with. Anyone is able to take out their contributions, their employer’s contributions and the interest earned to help buy their first home. The only catch is that you must’ve been contributing for at least 3 years. That’s how the standard KiwiSaver Withdrawal works.Click Here for more info around this.
The income cap and house price cap only applies to the KiwiSaver Subsidy aka ‘Kickstart Grant’ – that’s the additional $1,000 for every year you’ve been contributing to K.S to a max of $5,000. The three year rule still applies. Yes for this additional grant a combined income of $120k applies or $80k for an individual. Furthermore the maximum purchase price is $550k here in Auckland.
So it sounds like you WILL be able to pull some money out of KiwiSaver in 6 months’ time which will go past pretty quick I’d say especially if you’re focussed on clearing debt!
Often we are actually able to get people an approval even if they are carrying existing debt. One example comes to mind from a few weeks ago where a couple had a car loan of around $10,000 & Q Cards Totalling $8,000. The key to this was that they had good servicing ability i.e income so they were able to show that affordability was good even after paying living expenses, the new mortgage the car loan and even the repayments for the Q Card.
Hey with a bit of info from you I’ll be able to see if you’re in the same position? Would you like to find out?
Sarah: Thank you so much for clearing that up for me, bit of a relief that we can still use our KiwiSaver!
So, our financial situation as follows:
– Income: $135,000 combined before tax
– Current rent: $395.00 per week
Debt as follows:
– Personal loan: balance $1000, this will be paid off within the month
– Credit Card: $3800
– Partner’s Credit Card: $2000
– Two interest free holidays: $6000 – we will be focusing on this once the personal loan is done
– Farmers Store card:$1700.00
We aim to get rid of the above over the next few months. The only other debt is a car loan of about $9,000, which we’ll probably still have for a while.
Let me know what you think!
Matt: Basically I think you’re right to continue to clear debt especially the highest Interest Bearing debt. It’s good that you’ve got those other CC’s on the interest free holiday but just keep in mind the bank still considers these the same way come application time, so yes definitely try and clear these too.
But the reason I say that might surprise you – it’s not the total amount of debt that’s the real problem (although less would certainly be better). No, it’s the fact that the debt sits in lots of places!
You see, right now the picture I get of you two, is of a couple who have no hesitation taking on short-term, expensive debt to fund their lifestyle. If you’ve got less than 20% deposit, that’s a picture that will kill your mortgage application real quick. Furthermore 10% Deposit Mortgages need to be ‘squeaky clean’ or close to it.
So yes, focus on clearing all but the car loan, just like you mentioned. Once you’ve done that you then need to start saving the money you were using to clear those debts. This is just as important because the bank wants to see that you not only have the income to pay a mortgage (you do) but they also want to see that you are actually making a similar commitment now, as you would be if you were paying a mortgage. How do you do that? Rent + savings + KiwiSaver contributions should be roughly the same as your proposed mortgage payments.
So let’s work that out. A mortgage of $500,000 means repayments of about $2,600 per month. Which means you need to be saving about $600-700 a month for a few months after clearing those little debts on top of your normal rent and KiwiSaver contributions.
Looks totally do-able to me but will take about 6 months. Which is ok ‘cos that’s when your KiwiSaver pops up.
If you do those things I’ve got a very good chance of getting a mortgage approval for you… how does that sound?
Sarah: Thank you so much for your advice Matt, I really appreciate it!
We will continue doing what we’re doing and I’ll be in touch in a few months with an update.
Matt: Sounds good Sarah.
Touch base with me once you’ve cleared those debts.
You see a bit of guidance can make a big difference in helping you get to your goal quicker.
Working out what your current priority is in the pre-mortgage stages – whether it’s consolidating debt, paying it off, or creating a savings history – will focus your efforts and help you feel like you’re making solid steps towards your goal. You need to get those ducks in line before you go anywhere near the bank! Just remember a declined mortgage application hangs around like a very bad smell!
Finally the key difference between me and dealing direct with your Bank is Advice, because we are independent we always only have our customers best in mind, we are not obligated to recommend only one set of products like you would get when you pop into your local branch.
Feel free to give us a call or email and we tell you whether or not straight away where you stand.