Thinking about your finances when buying

A mortgage is money borrowed from a bank or other lender to buy a property. The home loan is secured by that property. Having a mortgage helps most of us buy a home years before we would be able to save the full price. In return, we pay the bank or lender interest on the amount of money we have borrowed over the period of the mortgage. A mortgage agreement is usually for many years, even decades.

(The terms "mortgage" and "home loan" can be used to mean the same thing).

The total amount of money borrowed plus interest that you pay back to the bank or lender over the period of the home loan will be significantly more than the price you pay for the property. This is why it is best to save as much bank deposit as you can and pay back your mortgage as quickly as you can to reduce the overall cost of your home.

A mortgage is likely to be the biggest financial commitment most of us make. We recommend you spend time investigating and understanding mortgages and your options before you take one out.

sorted.org.nz(external link) has a useful guidance on the types of questions to ask a lender when getting a mortgage.

It’s a good idea to have conditional pre-approved finance arranged with your chosen lender before you start looking at property to buy:

• Conditional pre-approval lets you know the price range you can buy in.
• When you find a property you’d like to make an offer on, having conditional pre-approval will help you move quickly.
• You will need conditional pre-approval if you are taking out a home loan to purchase a property at auction.
• Having conditional pre-approval shows agents and sellers that you are a serious buyer.

If you have family who would like to help you buy your first home, this can be helpful if you’re able to meet the repayments on a home loan, but don’t have the bank deposit.

Gifting

Gifting is when someone you know gives or lends you some or all of the money you need for your bank deposit. It’s a good idea for both parties to get independent legal advice, even if it’s a family member, and especially if the gift is a loan to be paid back in future.

Guarantees

A home loan is usually secured by the property purchased with the loan. Some lenders will accept another property, for example, your parents’ property, as security on the loan. In this case, the lender will need a guarantee from the owners of the property being used as security. We recommend both parties get legal advice before agreeing to this option.

Combining resources

Sometimes friends or family will get together to combine their savings to get enough money for a bank deposit so they can purchase a house together. This means you can share the cost of home loan repayments, bills and maintenance.

This should be thought of as a business deal, and we recommend that both parties get legal advice. You should think about what will happen if your circumstances change, for example, if one of you loses their job. Your lawyer may recommend a contract that will set out things like your share of the property, how much you have contributed, how maintenance costs will be shared and what happens if one of you wants to sell.

Residential property purchases do not usually include goods and services tax (GST), but there are exceptions if you or the seller is GST registered. Before committing to any property deal involving GST, we recommend you talk to a tax professional because you’ll need to understand if the price is inclusive or exclusive of GST.

If you're buying and selling a property, you may need to pay tax on any profit you make. The bright-line property rule means you may have to pay tax when you buy and sell a residential property within set period of time, the bright line period, unless an exclusion or rollover relief applies. You can find out if this rule applies in your situation by reading about the brightline property rule at IRD(external link)

Visit the IRD website(external link) for more information about property and tax.