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First-home buyers; it's tough but there is a way

First-home buyers struggling to get on the property ladder, especially in Auckland's sizzling-hot market, are turning to new builds, which fall outside the high loan-to-value-ratio restrictions imposed on the banks.

The Reserve Bank's LVR rules, brought in to cool down the housing market in 2013, limit banks to having no more than 10 per cent of their new residential mortgage lending on deposits of less than 20 per cent.

New builds were later exempted from the restrictions providing, at the point of sale, construction has either not begun or is at an early stage.

This allows the banks more leeway on lending to first-home buyers, who often struggle to save a 20 per cent deposit.

Buying off plans is a growing trend for first-home buyers, at PFG, many of whom are giving up hope of getting a house any other way.

First-home buyers have managed to get new homes with as little as 5 per cent deposit, though 10 per cent is standard, while others have been able to secure a bigger home in a more-desirable area than they previously thought possible.

There are fish-hooks to be wary of though with building. It’s a good idea to get good technical and legal advice before signing any documents.

In April, the Government's new $218 million HomeStart package kicks in, doubling the grant first-home buyers can receive and increasing the amount they can withdraw from KiwiSaver to buy a house. The house price limits for both HomeStart and KiwiSaver will be lifted in Auckland from $485,000 to $550,000, which is more in line with new-build prices.

Five things to watch buying off plans:

  • The timeframe for completion so buyers don't get stuck with an open-ended deal that could drag on.

  • That the deposit money is held in a solicitor's trust account with interest going to the house buyer not the developer.

  • Banks may approve a loan for a new build but the actual interest rate paid won't be set until at least 60 days before drawdown which makes future repayments uncertain.

  • Ensure that the contract's fine print doesn't include that the developer can cancel the contract once the houses are built and on-sell for an increased price.

  • KiwiSaver funds won't be released until settlement so they can't be used to meet the required deposit.

Loan-to-value restrictions:

What are they? A loan-to-value ratio is a measure of how much a bank lends against a residential property compared to its value. Banks were required to restrict LVRs of over 80 per cent (deposit of less than 20 per cent) to no more than 10 per cent of their new residential mortgage lending.

Why were they brought in? They were introduced by the Reserve Bank in October 2013 due to concern over the housing market.

What change was made? The Reserve Bank brought in the construction lending exemption to the LVR limits after feedback that first-home buyers were being adversely affected.

What does the exemption cover? The construction exemption doesn't apply to new houses already built on spec. The exemption applies to early stage of the construction, including having consent, essential services in place such as driveways, and substructure and framing already up.

Source: NZ Herald

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