Are you about to embark on the journey of homeownership? You may be wondering how much of your income should go to your mortgage payments. So, here are some things to consider.

How affordable is the property market right now?

According to the latest CoreLogic Housing Affordability Report, published at the end of August 2023, housing affordability across New Zealand has improved due to falling property values and rising incomes. However, on average Kiwi households are currently putting 49% of their income towards their mortgage – well above the historical long-term average of 38%. And we’re unlikely to see significant interest rate cuts for the foreseeable future.

On a more positive note, the ‘years to save a deposit’ measure has fallen to 9.6, much lower than in Q1 2022 (11.7 years) but still above the long-term average of 8.1 years. Also, value-to-income ratio continues to improve, albeit slightly.

If you’d like to compare housing affordability, you can use an online tool launched by the Government in 2022. The Change in Housing Affordability Indicator allows you to view trends in rent, deposit, and mortgage payments compared to median incomes.

Of course, affordability is highly subjective. So, read on to find out how you can determine if a home is affordable or not.

Why the rules of thumb are just… rules of thumb

In ideal times, one rule of thumb that some experts mention is the ‘28/36 rule’. This says that your mortgage repayments and other homeownership costs, like rates and insurance, should be no more than 28% of your gross income. Then, if you add other debt repayments (like credit cards and personal loans), the total shouldn’t be higher than 36% of your income.

Unfortunately, in the current market staying below these thresholds is not easy. The key thing is to be comfortable with what you’re paying.

Keep in mind that your lender has an obligation to ensure that you can service the mortgage you’re offered, not just now but also in the future should interest rates increase further. This includes them checking your income and expenses in detail, so you can rest assured that they will take a conservative approach to mortgage affordability – in your best interests.

On top of it, it’s crucial to run your own numbers, so that you can start your homeownership journey with peace of mind. This brings us to the next point…

Budgeting for homeownership costs

Owning a home isn’t just about mortgage payments. There are other costs to consider, including:

• Property insurance: This is a requirement in New Zealand to have on the property being used as security for a loan. Most importantly, having property insurance can protect your finances in case of natural disasters and other substantial damages to your home.
• Repairs and maintenance: Things can break or wear out. Regular tasks may include lawn care, painting, plumbing fixes, and electrical repairs.
• Council rates: These are local taxes used to fund regional infrastructure and services. They vary depending on where your property is located and its rateable valuation, which is updated every three years.
• Home improvements: Over time, you might want to renovate certain areas of your house, not only to enhance your living conditions but also to potentially add value to the property.

These are just some examples. For more on this, check out this handy guide from Settled.govt.nz.

Need help?

House hunting can be exciting, but don’t allow the thrill of the chase to cloud your judgment. Buying a home is a substantial financial commitment that will impact your life for years, if not decades. So, make sure you approach this decision with caution, foresight, and professional guidance.

A house that you can comfortably afford and maintain will provide a more stable and stress-free living environment than one that stretches your finances to their limits.

As always, we’re here to help. Get in touch with a SHARE adviser today if you’d like to discuss your personal insurance and mortgage needs.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.