Getting mortgage pre-approval

Mortgage pre-approval tells you the agreed amount you can borrow from your lender to buy a property. You should consider meeting with your bank or mortgage broker to apply for pre-approval once you have saved a deposit, but before you start house hunting, so that you can save some time by limiting your search just to houses that fit your budget.

Once you have pre-approval from The Co‑operative Bank, it’s valid for 90 days, giving you time to get house hunting - which is the fun bit!

Some of the documents you’ll need for your pre-approval application include:

• Proof of income, usually three of your most recent payslips.
• Details of your expenses, including any regular payments you make like childcare, and other outgoings.
• Information on any debts, including how much your repayments are and the total balance owing.
• Deposit evidence, like bank statements, KiwiSaver withdrawal forms, and evidence of any gifting for the deposit.
• Proof of identification and address.

From 1 July 2024, banks will need to comply with new debt-to-income (DTI) restrictions, set by the Reserve Bank. These restrictions will apply to new lending for residential homes in New Zealand, for both owner-occupiers and investors.

DTI is a measure used by lenders to assess a borrower’s ability to meet their debt repayments. A DTI ratio looks at the amount of debt the borrower has, relative to their gross (before tax) income.

Some banks already carry out DTI assessments when considering home loan applications. The new rules will set out standard restrictions which banks need to follow.

The DTI rules are additional to the existing loan-to-value (LVR) rules, which set out how much low-deposit lending banks can make.

Debt-to-income ratio limits from 1 July 2024:

The new DTI rules will allow banks to lend:

• 20% of owner-occupied lending to borrowers with a DTI ratio greater than 6
• 20% of investor loans to investors with a DTI ratio of greater than 7

Owner-occupiers

As an example, in most cases, if you’re purchasing a new home to live in, a maximum DTI of 6 applies (e.g. 6 times your gross income minus any existing debt).

Investors

If you’re buying an investment property, a maximum DTI of 7 applies (e.g. 7 times your gross income minus any existing debt)

There are some exceptions, for full information check out the Reserve Bank website

The Loan to Value Ratio (LVR) compares your loan amount to the value of the property you want to buy. To calculate the LVR you simply divide the loan amount, with your deposit deducted, by the value of the property.

For example, if the house you are looking at is $800,000 and your deposit is $200,000, then the LVR is 75%. This means the bank needs to lend you 75% of the cost of the property.

Understanding the LVR is important because it impacts the size of the deposit needed to be granted a home loan. An LVR over 80% carries higher risk, because the deposit made is less than 20% of the purchase price. However, it’s still possible to get a deposit with a higher LVR where the bank charges a low equity premium. This is where the bank charges higher interest in order to cover the risk of a low deposit.

Another way for first home buyers to get a home loan with less than a 20% deposit is through a Kāinga Ora First Home Loan. Get in touch with us today to learn more about your options.

The road to homeownership can be bumpy at times, and things can go wrong. Having a team of trusted professionals and family members on hand can help you get through it without making any costly mistakes. Think of them as your very own dream team!

Lawyer

Having the support of a lawyer can be critical. Any important documentation you sign should be checked over by your lawyer first. A lawyer or conveyancer is also needed for payment and transferring ownership on settlement day.

Builder or property inspector

A builder or property inspector is needed to assess any property you are seriously considering. They can tell you about the condition of the house and give you the heads up if it has any significant issues. This is an important part of doing your due diligence before purchase.

Family and friends

Emotionally, buying your first home is up there with planning a wedding and, like wedding planning, there can be setbacks along the way. The support of family and friends is so important as they can provide honest advice (and cups of tea) during the more stressful moments.

But believe us - when you are sitting in your new kitchen looking out your window, it will all have been worth it!