James PuahWhen you look at the Kāinga Ora website you will find the basic rules for the First Home Loan Scheme, but there are some less well known one’s that are tripping up a lot of first home buyers.
These are the “hidden” rules, or at least the less known rules that can catch you out.
Some make no sense – but they are there anyway!
Are You Eligible For The First Home Loan Scheme
The first thing that you should do is check the standard criteria and see if you are eligible.
The three major criteria that is advertised is:
- You must be a first home buyer – or you can apply if you are a previous home owner in a similar financial position to a typical first home buyer.
- You must have a 5% minimum deposit – but unlike the normal bank criteria, this does not need to be your own genuine savings.
- You cannot have earned more than the income cap – which is set at $95,000 (before tax) for a individual buyer; or no more than $150,000 (before tax) for a individual buyer who one or more dependents; or no more than $150,000 (before tax) for two or more buyers, regardless of the number of dependents.
This is the criteria that everyone can see on the Kāinga Ora website.
There was also a property price cap which has been removed now; however effectively for most people the property cap is now determined by what you can afford on the income that you have.
The Less Known Rules You Should Know
When you have checked that you meet the eligibility rules you may think that you fit the criteria, and while this gives you a good guide it does not meant that this is all that you need to “pass’ to qualify for a First Home Loan.
When the First Home Loan Scheme was introduces by Kāinga Ora (previously known as Housing New Zealand) it was designed to help the banks lend to higher levels by removing the risk for the banks. They have done this by using lenders mortgage insurance to remove the risk from the banks, but this comes at a cost to the borrowers adding 0.5% LMI fee.
This means as well as having to meet the specific banks criteria you also need to meet the criteria set by Kāinga Ora which was designed to satisfy the insurers.
There are five less known rules that you should be aware of:
Employment – they have a criteria where you need to be with the same employer for a minimum of 12-months or have been in the same position for 24-months. This means if you have been a nurse for more than 2-years but have moved to new employment then you should qualify, but if you have been a nurse and recently (less than 12-months ago) changed occupations then you would not qualify. The definition of “same position” is something that is hard to argue as Kāinga Ora make that decision and don’t enter into discussion on this.
Income – the income cap mentioned is non-negotiable; however this is historical income not what you currently earn. For people that are on salaries and wages this is the last 12-months income as per the IRD website, and typically for self employed it is the taxable income for the last financial year. This differs from what will be used to assess your mortgage as the banks and lenders use the current income for salary and wage earners and can add-back some expenses for self employed which often increases the income that can be used. In many cases a first home buyer may have a border or flatmate that helps with extra income and to cover expenses, and some of the banks will allow this to be added. (one bank allows 1 x boarder with no restriction if realistic for address).
Valuations – all properties financed with the First Home Loan will need a registered valuation. One of the key criteria with the valuations is that there must be five recent sales for comparisons (similar properties) within a 5km radius and that were sold in the last 6-months. While this is easy enough in the main centres this has caused a lot of problems in smaller rural towns where there are never enough sales – effectively this means the valuation is invalid for what is required.
Vehicles – you are allowed to own a vehicle each, but any additional vehicles could be treated as realisable or discretionary assets that could reasonably be expected to contribute to the purchase of a property. Kāinga Ora has determined that the net equity of other vehicles (such as classic motorbikes, additional cars not used as reasonable means of transport for private use valued in excess of $5,000) should be sold and the proceeds added to your deposit.
Exempt of LVR Rules – technically any bank can offer lending with 5% deposit but The Reserve Bank has made it very hard for banks to do much lending where there is less than 20% deposit and for this reasons banks will rarely (if ever) offer lending to 90% or more. This is where the First Home Loan through Kāinga Ora has become popular especially since the price cap on the houses have been removed.
Banks – a lot of people do not realise that there are only some banks that offer the First Home Loan through Kāinga Ora. The major problem with this is that a lot of Kiwis still tend to go to their own bank for mortgage advice, and when their bank is not one offering the First Home Loan (through Kāinga Ora) then those people can assume that there is no way they can get the finance for their first home.
Banks are not well known for suggesting that you go to another bank – they have only that banks options and of course that is not always going to be the best option. That’s where mortgage advisers add so much value – they have a choice of banks and lenders
So you need to be very careful where you get advice, and it shouldn’t be from a bank.
What You Can Do Without Kainga Ora
As mentioned, not all banks offer the First Home Loans that are promoted through Kainga Ora and given the rules then there are people that will not fit the eligibility criteria either. But banks and non-bank lenders can still help in various situations.
So what are the other options?
Banks – they can still do some low deposit lending, but it’s generally very limited, they don’t do pre-approvals and often only for existing bank customers. This is not great especially when the banks are not doing the same level of home loans, but it’s worth asking your mortgage adviser.
New Builds – these are exempt from the LVR rules that restrict borrowing where there is a low deposit. This means that banks can still do low deposit lending for new builds and one bank even does finance for new builds with as little as 5% and has a special interest rate for first home buyers too.
Non-Bank Lenders – there are a few of the non-bank lenders that can provide home loans with a 10% deposit. Being non-banks they vary in what they charge with some being less than the main banks but typically they will be more expensive with fees and higher interest rates.
Shared Ownership – this is a popular option when the traditional ways to finance a purchase are not going to work. Again there are limited options, but it’s worth looking at if you are really keen to buy a home. CLICK HERE to learn more.
Prepare Your Mortgage Application Well
Buying your first home is a major event, and you owe it to yourself to give yourself and your family the best chance of being approved.
It’s almost impossible to know all the rules for the First Home Loan Scheme as they will not publish and will not openly tell you; however from experience some of the more experienced mortgage advisers have learned more of these “rules” and can help ensure that your application has the best chance of success.
Why would you go directly to a bank, potentiality unprepared?
Finance has become quite complex, with banks having different criteria and only some banks offering the First Home Loan Scheme. As a first home buyer you want to know that you have tried all options and of course ended up with your first home loan from the bank that will be best for you.
