As interest rates hit historic lows and house prices finally ease, first home buyers are beginning to peruse the housing market once again in the hopes of getting onto the property ladder. If you have a secure income, and/or the backing of a parent, now could be a great time to purchase your first home. But buying during a pandemic does mean taking a few precautions. Here’s our top five tips before you sign on the dotted line.
1. Make sure any sale and purchase agreements take COVID 19 into account
We always recommend discussing any agreements with your lawyer before signing up to a purchase. The COVID-19 situation makes this even more important. While we are all hoping that the Alert Levels will continue to go down and stay down, the conditions in your agreement need to future proof you for today’s ever-changing circumstances and suit your personal situation. For example, we may need to:
- provide for longer time frames for you to organise building inspections, complete your finance applications (including Kiwisaver applications), and obtain a LIM report, as banks and local councils may have a backlog of work to get through
- make sure settlement dates account for Alert levels, and
- ensure we add coverage so you can get out of the agreement if your personal circumstances change due to the economic fallout from COVID-19.
Our property team is here to help you work through any transaction. We are able to discuss your needs with you on the phone or through video chat, access all of our files electronically through our digital office and witness the signing of various documents through live video recording if needed, to help you keep moving in a safe way.
2. Know the lingo
Here are the common methods of sale you’ll encounter when buying a house:
Conditional Offer – When negotiating on price don’t give too much away. Remember the agent’s job is to act for the vendors and get them the best price (and one day, when it’s your turn to sell, you’ll thank them for it!). Do your research before putting pen to paper.
Auction – Do be careful. There is usually no ability to add conditions at auction, so it’s harder to protect yourself. If you’re serious, get a lawyer to check out the property before the auction. It is vital to get pre-approval from the bank so you know your price limit.
Tenders – Tenders can feel scary because you never know how much to offer, and there is particular paperwork to be completed. Saying that, these factors can put off other buyers, improving your own chances! Start by looking at the CV/QV, recent sales in the area for comparison (agents will usually supply these for free) and then check out the house. The value will vary depending on improvements, location and other aspects.
Private Treaty – This is an agreement to buy a property that the vendor has marketed for sale themselves, not through an agent. We expect to see more of these as people list homes privately to avoid paying large commissions.
3. Make your agreement work for you
Conditions can be added to the agreement and they usually allow a certain number of days in which to satisfy them. They can be there for the vendor or for the purchaser. The deposit is (usually) payable on satisfaction of all the conditions in the agreement.
The three key clauses you definitely want to see in your agreement are:
- Finance – The timeframe for this clause should match the LIM. This is to avoid a situation where you have been approved for a certain value and then the LIM shows up certain things which may affect your ownership of the property or ability to obtain finance.
- LIM (Land Information Memorandum) – A LIM is essential, and usually a standard condition. It will tell you, among other things, if:
- the house has a building permit or a consent
- any Building Consents have Code Compliance Certificates
- there are any archaeological zones on or near your property
- swimming pool fencing requirements are up to date and comply with the relevant Act
- there are Zoning and Environment rules which may affect your ownership of the property, and
- any additions or alterations have been done without getting the correct permits or consents.
- The LIM may also have the plans for the house in it, and other important pieces of information about the property.
- Builder’s report – This will tell you if the house you want to buy is structurally sound! Or, if there are any defects or aspects that need repair, or maintenance likely to be needed soon.
Title – The agreement also allows your lawyer 10 working days to check the title of the property. You can make objection to the title in certain circumstances if the title is not in order.
4. Tap into Kiwisaver if you can
If you have been contributing to KiwiSaver for at least three years you may be entitled to withdraw your savings, as long as you leave a minimum balance of $1,000 in your KiwiSaver account (excluding any amount transferred to your KiwiSaver from an Australian complying superannuation fund).
You also need to:
- intend to live in the property you are buying as your main residence
- have never owned your own property or land before*, and
- have never made a withdrawal from a KiwiSaver scheme to purchase a home before.
*If you have owned your own property or land before, but no longer do so, and have never made a withdrawal from a KiwiSaver scheme to purchase a home before, you may qualify as a previous home owner. You’ll need a letter from Kainga Ora – Homes and Communities (formerly known as Housing New Zealand) to confirm that you qualify.
You are only allowed to make one first-home related withdrawal from your KiwiSaver so you’ll need to decide whether you want to use the funds to pay the deposit on the property, or on settlement. All Kiwisaver applications need to be submitted fast. You want to be sure these applications are approved within the finance condition timeframe so you will need to submit them within a few days of signing up an agreement. You’ll also need to make it clear to the vendor that you are using KiwiSaver for the deposit, as they may need to agree to hold the funds until settlement – they won’t be able to access them right away. There is a special clause to add to the agreement to ensure the vendor provides this agreement. Otherwise, they do not have to. This can cause problems for a purchaser.
First Home Grant
If you’re buying an existing house under $400,000 or a new house under $500,000 in Northland, you may be entitled to a First Home Grant. For an existing/older home, the grant is $1,000 for each year of contribution to the scheme, so from $3,000 to $5,000 (five years) maximum. For a new home, land or a property bought off the plans, the grant doubles: $6,000 to $10,000.
You need to apply for the First Home Grant within the finance timeframe as you want to be sure this application is approved alongside your finance application with the bank. You can apply for pre-approval (similar to finance pre-approval from a bank), which lasts six months. You can only receive the First Home Grant once.
5. Find out how to structure support from your parents (if required)
These days, more and more parents are stepping in to assist their children into their first home.
However, it’s important all purchasers are fully informed before taking the step on to the property ladder together, and that parents have sufficient protection in place should something go wrong.
There are a variety of ways parents and children can acquire property together, and there are risks and benefits to each structure.
Some common property structures
- Child acquires property in their own name with assistance from parents, or parents’ or grandparents’ Trust
- Child and their friend (non-romantic) acquire a property as tenants-in-common with assistance from either one or both sets of parents or their respective Trusts
- Child acquires property with their partner either jointly or as tenants-in-common with assistance from either one or both sets of parents (or their Trust or Trusts)
- Child acquires property either on their own or with a friend, or partner with one or both sets of parents providing a guarantee to the bank
- Child (with or without their partner) acquires a property in co-ownership with parents (or their Trust) with the respective shares held as tenants in common, or
- Family Trust acquires a property on behalf of a child.
What structure is best?
What structure you decide on will depend on your circumstances. Some of the factors you’ll need to consider are:
- How much of a deposit has been saved?
- Have bank equity requirements been met?
- Will KiwiSaver contributions and/or First Home Grants be accessible?
- Are interest payments serviceable?
- Will tenants be required?
- Does the property require further work?
- Is this a good investment?
- How long do you intend owing the property?
- Will a contracting out agreement be needed?
- Will a property sharing agreement be needed?
- What will happen if a relationship breaks down?
- Is it a gift or loan? What happens if the loan is called upon?
- Is a guarantee required and if so, is it limited or unlimited?
- What is your tax residency?
- Who is to benefit on your death?
- Are you able to provide this assistance to all of your children?
These questions are best discussed with a professional adviser to ensure you implement the most effective structure for both parties. When you’re in the heat of making offers, timeframes are tight and emotions can run high. If you are beginning to house-hunt and your parents have indicated they will help you financially to secure the property, we suggest talking to one of our team early on to understand what structure will best for you.
It’s easy to get caught up in the competition aspect of buying a house, especially in today’s market. Make a realistic plan and stick to it. Often we talk to purchasers who are upset initially if a deal falls through, only to be much happier with the property they eventually end up purchasing. Keep looking, and when it’s meant to be, it will happen.
Happy house hunting!
Our thanks to Rosie Allen for writing this article.
This article is not a comprehensive guide. Each situation can be a little different, and we recommend getting legal advice. Our team is excited to help you into your first home and guide you through the process so that you understand what is happening each step of the way.