The best start

Buying an apartment: Your mortgage options

4 min read

Because apartments are usually cheaper than stand-alone houses, they can be a practical option for first-home buyers. They’re often located close to many amenities and conveniences so may mean you don’t need to compromise on lifestyle. It's important to appreciate though, that apartment ownership is different to owning a house with a patch of land. Consequently, banks tend to view apartments differently when approving home loan applications, and certain things like size and location may affect how much you’re able to borrow. It’s a good idea to speak with your bank sooner rather than later to understand your options.

Size matters

If your budget is tight, you may be tempted to buy a small apartment. However, different banks have varying policies for lending on small apartments, and some are more cautious than others.

The good news is that banks may lend up to 80% of a larger apartment’s value – again policies vary from bank to bank in terms of how much they are willing to lend, and what criteria you must meet to be eligible.

To make sure you fully understand what restrictions and policies may be in place when it comes to buying a smaller apartment, the best thing to do is speak to the individual lenders. That way you’ll have a better idea of how much you may be able to borrow depending on the size of apartment you’re considering purchasing.

The costs of owning an apartment

There are a host of other expenses that don’t concern tenants that you could be responsible for as a homeowner. So, being able to afford a certain amount in rent doesn’t necessarily mean you can manage the same in mortgage payments.

An apartment may come with the benefits of being able to share in amenities such as elevators, gyms, swimming pools, and gardens with other apartments in the building, however there’s also a cost asssociated with this. Also, nearly all apartment buildings are managed by a body corporate that charges all owners a body-corporate fee to keep everything maintained and operational. Average body corporate fees in Auckland for example, are $4,000 to $5,000 per year.

Leveraging KiwiSaver HomeStart

KiwiSaver has opened the door to many people who, in days gone by, would have taken longer to purchase their own house. If you're a first-home buyer who has contributed to KiwiSaver for a minimum of three years, you may be eligible to withdraw some of your savings for a deposit. On top of this, you can apply for a HomeStart grant of between $3,000 and $10,000. The amount you will be eligible for depends on how long you have contributed to KiwiSaver and whether you’re purchasing an existing or new apartment. If you have owned a home before but no longer own a house or land, you may still be eligible.

Getting your finances in shape

Being able to scrape together a deposit for a house is great. However, the bank may want to take a look at the rest of your finances. It is important that you demonstrate to your bank that the rest of your finances are in order; so it’s a good idea to repay any debt and clear any bills that are outstanding, which may affect your credit rating.

Playing it safe

When you apply for a home loan, your bank may ask you to list all your current living expenses, such as electricity, groceries, insuranes etc. Your bank may create a buffer and work on the higher side of what it considers the normal cost for your living situation. Itmay also use a rate higher than the current interest rate to calculate how much you can afford in mortgage payments. Both measures provide some assurance that if living expenses and interest rates increase, you will still be able to afford your mortgage. Banks may also often recommend that you take out insurance to protect yourself and your family should you lose your life, health, or employment.

Structuring your mortgage

You can structure your mortgage as floating, fixed, revolving, or a combination of all three. When it comes to mortgages there isn’t a one size fits all solution, so we recommend that you talk to your mortgage advisor about how they can structure your mortgage to best fit your lifestyle. To lessen the impact of any interest-rate movements, some people will spread their fixed mortgage across two or more terms so that it doesn’t all roll off at the same time.

Some banks, like BNZ, also offer an offset mortgage which can help lower the interest you pay by looking at the combined balances of your accounts and subtracting these from the total owing on your home loan, meaning you only pay interest on the remaining amount. You can even pool accounts with family members to reduce the interest amount even further.

How offsetting works

 Offsetting image for article2

Check out the video below for more information.

If you’re ready to apply for a home loan all you have to do is get in touch with a mobile mortgage manager who can work you with you to understand your situation fully and design a mortgage that best suits your needs.