in your best interests
As you’ve no doubt spotted, buying your first home in Wellington is becoming harder and harder to achieve. So why not buy an investment property in the provinces instead?
They’re cheap (well, a lot cheaper than in Wellington) and you get a tenant who covers most of your mortgage payments. Couldn’t be more straightforward!
Well, maybe...However, there are a few things that need to be added into the mix before you leap into purchasing your first rental.
Let’s use Upper Hutt as an example. The average house price in July 2017 in Upper Hutt was $448,000 (or thereabouts). Across Wellington the average house price in the same period was $747,000.
1.Deposits - You Need 40% for an Investment Property
That’s the cold, hard truth at this point in time. If we look at the average property in Upper Hutt as our example you would need a deposit of $179,000 to meet the 40% deposit criteria. How many first home buyers have a deposit of $179k?!...Not many I can tell you. Realistically the deposit for a first homebuyer is more likely to be $40-80k, with a few stretching just over $100k. Achieving a whopping deposit of $179k when you are just starting out is not common at all.
If you had managed to save up $179k (which would be impressive!) this would potentially allow you to buy an owner-occupied property in Wellington (where you probably work, live, socialise etc) up to a value of $895,000.
So the question would be - would you prefer a rental property valued at $448k or your own home valued at $895k?...
If you are buying a rental property you also need to consider that any KiwiSaver funds you have saved can’t be accessed for this purpose. The vast majority of first home buyers we see have a significant portion of their deposit in KiwiSaver funds, so achieving a $179k deposit excluding this part is as rare as hens teeth.
3.The Next Step
Assuming you do decide to purchase a rental property (using your $179k cash deposit) the question is then “where to from here?”.
If you ultimately want to purchase your own home to live in you will need to save up another 20% deposit to achieve this and/or rely on capital growth to create some equity.
Building equity on a $448k rental property in Upper Hutt could be a long process. However, if you had opted for the $895k home in Wellington, achieving capital growth of $179k (which would be enough equity to purchase the UH rental) is far more realistic.
You would still need to see 20% growth, but it’s worth bearing in mind we’ve seen 14% growth in the last 12 months across the city. Sure, this won’t continue forever, but capital growth on a more expensive property, in a more desirable area will always outstrip cheaper properties in less desirable areas.
So, if you see articles suggesting a rental property outside the main centres is the way to go, just remember not all is as straightforward as it initially looks!
If you've got plans, questions or just want to say g'day then click the button below now!
Buying your first home or a new property is an exciting time. Banks are advertising great rates. Choosing a bank couldn't be easier. Right?!...
Unfortunately, it’s not always as simple as it looks. For a lot of buyers, especially first home buyers, your first property may be purchased with a deposit less than 20% of the purchase price.
If borrowing more than 80% the advertised ‘special’ rates you see in the press may not apply to you. It is more likely that you will be offered the bank’s ‘standard’ rates (that are seldom advertised) and you may be subject to a Low Equity Fee or Low Equity Margin which can add a further 0.75%pa to your interest rates.
For those that have managed to save up a 20% deposit (or more) borrowing can be a lot less expensive. However, be careful not to immediately plump for the bank with the best advertised rate. Sure, it may look like a good rate but the very best rates are never advertised. These are the rates that an experienced mortgage broker sees daily, but the public don’t.
Engaging a mortgage broker gives you an advantage over the normal customer that deals direct with a bank. We know which banks to approach based on your circumstances, and we know what rates are achievable as we negotiate these each and every week.
As an example, one of the main banks is currently offering rates around 0.5%pa lower than their ‘special’ rates for the right deals. These aren’t advertised, so without a broker's’ insight knowledge you would never be aware of this.
The key to ensuring you get the best deal is to shop around - and that is where your mortgage broker can really add value. Our services are completely free, so make sure you contact us today to discuss your plans.
Brian MacLean looks into tips, ideas and strategies you can use to get ahead financially..