Journey to Home Ownership – Roof

This is the third blog of the series on my ‘Journey to Home Ownership’. We’ve covered off the foundations, the bricks, and now it’s time to put on the roof! To me this represents the final covering, the ceiling which seals the deal. This sits on the top of the foundations and walls we built, meaning we wouldn’t have a roof without sorting those things out first. At the same time, what’s the point of a solid foundation and some walls if we don’t finish it off and have a roof over our head! This roof represents the final steps in my journey that were required to lock in my first home at the age of 21, so I hope you find it inspiring and insightful.

The Personal Process

I am going to start off by repeating the fact that there is a lot of personal work that has now been done before moving forward. After all, this whole journey is connected from start to finish so I don’t want you to read this and think you can jump straight into approaching banks or shopping for houses. For me, I only approached the banks after about 2 years of solidifying my financial foundations, and about 6 months of executing the plans I had set up towards buying this house. 6 months might not sound like a lot of time, but that is a lot of weekly meal preps to get my meals down to about $3 each, a lot of skateboarding to work to save on petrol. The way I see it is that by the time I walked into a bank to ask for money, I was confident in myself, had a goal, and had a plan. I think of it like Olympic medals, they are essentially earnt in the training and hard work the athletes put in long before game day. Yes, the medal is technically only won on game day, but that final performance enabling the win is only possible off the back of a lot of training. It took Usain Bolt less than 10 seconds to become the worlds fastest man, but that 10 seconds was only the last fraction, not even 1% of his entire journey, all the hours spent on getting there. I’m definitely not an Olympic athlete, but the same principle still applies. We need to put in our own hard work before moving forward.

Now being honest, I lacked a lot of knowledge on the actual home buying process the first time I walked into a bank, but hopefully that’s not the case for you and you can walk in there with a lot more understanding thanks to this post! Nonetheless, I had definitely undergone the personal process, so here is somewhat of a checklist that I had accomplished at this point:

• I knew my WHY very well
• I had clearly defined my goal
• I understood all my numbers (thanks to budgeting and tracking every cent)
• I had a deposit goal, a realistic plan to achieve it, and 6 months worth of executing this plan on a daily basis.

The Borrowing Process

The time has come where you have to face the reality that we need to borrow a significant amount of money to purchase our first home. Let me walk you through how you go about borrowing money. Rules and regulation will change over time but the foundations and concepts are very consistent. There are essentially two options you have to acquire a loan to purchase a house, approach a mortgage broker or a bank directly. In my opinion, the broker is more valuable as they attempt to acquire lending across several banks or mortgage providers which gives you more chances, but here are the pros and cons of each option.

Once you have decided where you will be applying for a mortgage, next is to put your best foot forward in applying for a pre-approval. This is where they will assess you and provide you with the maximum amount of money you can borrow. The goal here is to get pre-approved for as much as possible as this will give you more space to shop for the right property. Here are the standard pieces of information that will be required when applying for this pre-approval (and most other financial assessments):

• 3 Pay slips for Proof of Income (Money-In)
• 3 Months of Banks Statements (Money-Out)
• Confirmation of deposit (Savings statements, Kiwisaver balance & withdrawal confirmation, Grant pre-approvals, etc.)
• Two forms of Identification (E.g. Licence and Passport)
• Address Confirmation
• If possible, any details of the home you want to purchase (e.g. Sales and Purchase Agreement, Registered Valuation)

Now, here is potentially the most valuable portion of this post (even though it’s all relevant!). You see, I was denied quite a few times or at best was receiving pre-approvals way below the amount I needed to buy my first home. For example I would get pre-approval of about $350,000 which is not going to cut it if I’m aiming for a $700,000 house. So what I did is spend some time deciphering the black box of this machine that takes in all my information and spits out a number of how much I can borrow. This single number determined my future, whether I would provide a house for my future wife or not, whether I would be able to break the theme of young university graduates not having access to the property ladder, whether I would pay someone else’s mortgage by renting every week. So what did I discover? Here is a break down of the key concepts you need to know:

• The final amount you are allowed to borrow is determined by your ability to pay a mortgage, which they call your “serviceability” due to your ability to service the loan. This makes sense as they’re only going to lend you an amount they think you can afford consistently. 
• They calculate how much spare money you have each month to pay a mortgage, excluding rent as this is something you won’t have if you bought your house. A common term for this is UMI, short for ‘Uncommitted Monthly Income’.
• This is determined by looking at your monthly inflow (based on your pay slips) and your monthly outflow (based on your bank statements). E.g. if you make $5,000 every month and spend $3,000 each month, then they will assume you only have $2,000 to pay a mortgage.
• PRO TIP: They have caps and floors on specific areas, for example if your statements say that you only spend $30 on food a week (let’s go chicken and rice!), they will not believe you and will raise your food spending number to their floor assumption that no one spends less than $150 on food a week.
• Lastly, they use your monthly UMI to reverse engineer the maximum mortgage you could afford. Using our example, a spare $2,000 each month could pay for a mortgage of $300,615 (at 7% interest). This monthly cost is based on an assessment rate which is significantly higher than the current rates, with the intention of protecting you in the scenario of interest rates rising which increases your monthly mortgage payment.

Understanding all of this is crucial, and let me show you why. If you can prove that you have another $50 every week (about $217 a month), then that would enable you to borrow another $30,000 in this scenario! Suddenly a meaningless $50 a week could result in a $30,000 impact on your finances. On top of this, you now understand that it’s all about the way they perceive your finances. Hopefully if you’ve followed my journey and applied the knowledge then you will have a very strong idea of how much goes in and out of your account each month. All it takes is for them to paint the wrong picture of you and your finances and you’ve lost the house. For example, one assessment I had assumed I spent an absurd amount of money on food each month, meaning I couldn’t borrow much. I drilled down into their numbers and figured out that it was driven by a big PAK’n’SAVE purchase which was actually for a family celebration. Since I know my numbers and have tracked everything, I politely corrected them, explaining it’s not an ongoing expense, and suddenly my profile had a spare $107 on food each week, resulting in me being able to borrow another $70,000! If we take this further and look at every category of spending, if they misinterpret $153 a week, that’ll reduce my borrowing power by $100,000 which is crazy right! That can definitely be the difference between becoming a homeowner or not, and understanding this is a big part of how I managed to push through and get a home at 21 despite being on a minimal graduate salary.

The Buying Process

Once you have received a pre-approval amount to understand how much you could borrow, it’s time to go shopping! This is the crowd favourite part of the journey, the time when you can hunt for your dream home while knowing exactly how much finances you have. For example, if you have a pre-approval from your bank essentially saying “you can borrow $610,000” and you have $70,000 across your full deposit plan, then you can look for houses in the $650,000-$700,000 range, so get out there, shop online, visit show homes, even sit in on auctions.

This is also a great time to build more of a team around you to help with the entire process, such as lawyers, real estate agents, insurance brokers, etc. You have mastered your part of the journey and got yourself 95% of the way there, now in the last 5% you can get specialists in to help you with nitty gritty details. Being honest, I find it a bit sad that they only enter the picture now because this is the part where they can make money off you, when you’ve saved up and are ready to make a big purchase, but nevertheless they are valuable. Once you have found the right home and have your team sorted, here is a simplified breakdown of your next steps:

• Make an offer on a Sales & Purchase Agreement. Your lawyer will help you out here but don’t be intimidated, have a go at reading and understanding the whole contract. 
• Go unconditional. Once you and the seller are happy then it’s time to go unconditional, meaning your offer has been accepted and it’s locked in!

Next you will need to work through the remaining admin with your team:

• Fulfill the finance conditions to secure the full approval of the amount to borrow.
• Meet all the remaining conditions within the Sales & Purchase Agreement.
• Structure and sign your mortgage.
• Lastly, on settlement day the house is legally yours! All that’s left is move in, or if it’s a new build, wait for it to be built and then move in.

For my fiancée and I, we settled on the 12th of February 2020 and 21 year old me celebrated being a homeowner with a steak dinner before heading off to play some casual summer sport, so do the same and make sure you celebrate. Currently we are waiting to move in, so I will keep you updated if there are any other big parts of the journey I think you should know about, but so far it feels like all the real hard work is over and we are simply focusing on getting married!

Key Points:

1. Nail the personal process of buying your home before anything else.
2. It’s easier and quicker to borrow $100,000 than save $100,000 so understand and master the borrowing process!
3. Knowing your numbers empowers you to influence the picture the banks paint of you.