Buying your first home can be exciting but sometimes stressful as well.

First home buyers appear to be getting squeezed from the market as investors snap up a large share of properties. It came as New Zealand’s house prices were more than 10 per cent higher than last 12 months.

Recently, some banks have announced tougher LVR (loan-to-value ratios) rules – investors need a minimum 40 per cent deposit while owner-occupier still need a 20 per cent deposit, start taking the heat out of the market. Still, the prices are rising too high and stretching beyond the limits of many first home buyers. Some of them are struggling harder with ever-rising property values.

Because we help many first home buyers on the daily, we understand the process and the barriers along the journey. So we thought we’d put together three top tips for first home buyers below so that you know how to set up your buying rule, especially if you can’t afford your dream home in today’s market.

Tips for first home buyers NZ

Video Timeline

1. Getting on the property ladder as soon as possible - 01:08

2. Focus on equity - 01:50

3. Buy an existing house rather than a new build - 04:37

1. Getting on the property ladder as soon as possible

Getting your foot on the property ladder can be challenging when the house prices keep rising beyond your budget. We have seen that some clients took more than a year from the first-time inquiry to decide to apply for a loan pre-approval. The growth in property values was unbelievable fast over the last 12 months, rising at least 10 to 15 per cent, in some areas it’s over 20 per cent.

That’s why we wouldn’t recommend keeping waiting in a slice of hope for the property market to ease ahead or even drop. If you buy a good property, the capital growth of the property may grow faster than your savings speed.

2. Focus on equity

What is equity in a property? Equity refers to the difference between the market value of your property and the remaining home loan balance.

As a first home buyer, you may think equity is what investors focus on rather than yours. In our view, first home buyers should also focus on building equity when choosing the property to live in, especially if you can't buy your dream home straight away. This is because your household incomes can grow over time as you have more working experience, which will take care of the loan servicing side. However, without capital growth in your first home, it’s going to be very hard to satisfy bank’s deposit requirement.

But if you buy a right property that with capital growth, you can end by using sufficient equity to borrow for your next one, based on the premise of enough income. We are going to illustrate this in more details below:

For example, you provide a 10 per cent deposit, $80,000, to buy a house worth $800,000. Three years later, suppose the property grows in value to one million dollars. After you sell the property, you should be able to get $250,000 in hands, which allows you to have enough deposit (suppose still 10 per cent deposit requirement) to borrow for the house up to $2.5 million. On the other hand, if you want to upgrade to a $1.25m property, you already have 20 per cent deposit. This will help you get very attractive interest rates and cash back.

Now, your question might be: how to find a property that has the potential for capital growth?

There are two fundamental principles that help you choose the property with the most equity potential:

• As close as to the CBD – property growth has a ripple effect. If you're buying a property close to the central area, you’ll have a higher chance of capital growth.
• Infrastructure investments – buying a property in an area with the development of infrastructure. It indicates population growth and ultimately increasing demand for the properties in the area.

3. Buy an existing house rather than a new build

Some people love the idea of a brand-new home – more comfortable and less maintenance involved.

Buying a new house means you are not able to add value to your home through renovation. What’s more, most of the new houses in today’s market are built as terrace houses or apartments. But with these types of property, you may have little chance of capital growth due to small land. We’d recommend that you consider it from a capital growth standpoint.

Hopefully this has cleared up your buying rules in order for buying your first home. These three tips are not only suitable for people who can't purchase their dream houses in today’s market, but also for people who have enough budget to purchase their dream house and look to buy more properties later on. It helps you buy rental properties as soon as possible and generate wealth and passive income in the future.

Prosperity Finance - Here to Help

Any questions? Or looking to get into your first home? We’re here to help. Call us at 09 930 8999 to have a no-obligation chat with the team at Prosperity Finance.

Read More:

What are the commonly accepted deposit sources for buying a house in New Zealand?

Is it better to buy an investment property before first home?

How can I have a newly built house if I can’t find my perfect home in the current property market?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.