Kids versus a mortgage? Why getting into your first home is harder with children

Do the chances of buying your first home seem akin to winning the lottery? Well, don’t give up because respected property and business journalist Susan Edmunds has done the hard work to show you how to get into your first home as quickly as possible. From Renter to Owner is a step-by-step guide to buying your first home, no matter how daunting it may seem. In this exclusive extract Edmunds examines the extra hurdle of having children.

Back when our parents were buying houses, there was a traditional ‘life process’ that most people followed.

People would often marry, then buy a house, and then have children. But over the years, as people have started getting married and having their kids later in life, and houses have become too expensive for most young people to buy in the early years of their working lives, things have become a little less straightforward. Now it is much more common to see people who have been together for a while, and who may already have a few children, thinking about trying to purchase a property.

The bad news is that banks are not huge fans of people with kids taking on large amounts of debt, unless you have really good incomes.

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It is not that they don’t like children (well, maybe some of them don’t, but who knows?). In general, they’re not keen on anything that sucks money out of first-home buyers’ budgets on a long-term basis. And anyone who has kids knows that they can be quite expensive wee creatures for quite a long time.

Rupert Gough, who is chief executive of Mortgage Lab, says it comes back to what banks think of as the ‘base cost’ you have to cover each month, or the minimum your family has to be able to pay in expenses to stay afloat.

‘If you live on white bread and rice and soy sauce and that sort of thing you can reduce your costs right down but the banks still have a minimum cost they use for each category.’

He said kids are another one of those categories. Even if a family is able to cut their costs – maybe by having really cheap childcare, for example – the bank will still add a minimum cost to its calculations that their budget will have to cover. He says that is usually about $500 a month as a minimum but will vary between the banks.

Gough says that means, all else being equal, a couple of first-home buyers who are applying for a loan and have children will have to earn $500 a month more after tax per child than someone who does not yet have kids.

‘Costs go up for a couple with kids versus a couple without. The irony is that a couple with kids need more bedrooms so they probably need a more expensive house, but the bank has to take into account the additional costs. It’s significantly harder for couples with kids. The $500 is after tax, so that couple has to earn $800 a month more.’

Any expenses you have for your kids may also be deemed to continue indefinitely, so you are better to apply for a loan after the subsidy for your childcare kicks in when the kids turn three, for example, than to try when they are two-and-a-half with the expectation things will soon become cheaper.

‘One quirk of the CCCFA is that with the cost of education, whether public or private, if a child is Year 11 you’ve only got two or three years left of schooling but the bank still has to take that as an ongoing expense throughout the whole mortgage,’ Gough says.

‘That’s often a frustration for people. Even if your child has only a few years left at school or [with a particular cost] the bank has to take it as if it’s spread over 30 years. Whatever your expenses are now, even if you are about to get a subsidy, you’ve got to survive until that happens so the bank has to take it as it is now. The message is that the cost of having a child fluctuates depending on their age but the bank just takes your current expenses, and you have to take that on the chin.’

Gough says it’s easier to get into the market before having kids as the bank doesn’t query your expenses once the deal is done, unless you need to borrow more money. He says while people often wait until they have higher incomes, house prices also tend to rise over time, so waiting is not always the best financial option.

‘You know what your expenses are when you own, whereas when you rent you are subject to the expenses of rent at that time. Once you have a mortgage the bank doesn’t reassess unless you ask for more money. Having a child after you’ve got a mortgage, the bank isn’t going to whip the loan away because you have an extra cost. It’s up to the homeowner to think about how they’re going to pay it [at that point].’

So if you have kids, what can you do? The advice for first-home buyers with kids is much the same as for any other buyer, except that you will have to prove that you can afford to cover the expenses of your family. Keep your spending as low as you can for the three to six months before you apply and boost your income as much as possible.

Run as much of a budget surplus as you can and be prepared for extra questions about what you spend on your children.

BUYER STORY

Carrie bought a home in July 2021 after renting in Wellington for a long time. She says she had a good set-up as a tenant, in a house out in Shelly Bay, which then became the site of a land dispute between a developer and occupiers protesting the development.

‘I was living out there for seven years and then the occupation moved in and the developer kicked everyone out.’

Carrie initially lived there with her former partner and their two children, and says the rent was stable during her tenure. ‘All the rent around town went up but that rent stayed the same. It was expensive when we moved in, for a three-bedroom house, but then everything else escalated. It was a cheap place to be living after the relationship broke down.’

She was given three months’ notice and started looking for another place to rent for herself and two children, then aged nine and four, but couldn’t find anything suitable. ‘I didn’t really feel like I was going to get any certainty out of renting in the area.’

She had $40,000 in her KiwiSaver and borrowed another $80,000 from her parents. ‘They don’t have a lot of money. That was their retirement fund – they don’t own a house but they put it in and I bought a house in Whanganui. I couldn’t buy in Wellington.’

Carrie says she was still owed a significant amount of money from the business that she owned with her former partner. Moving to a different town was an opportunity to leave some of the trauma behind and start afresh. ‘Through all of that, the separation, I lost my job and I have been on the single parent benefit since then.

‘Whanganui was a great escape for me.’ Initially, she says, she felt there was little hope of someone giving her a mortgage, but she spoke to a couple of mortgage brokers and started to think there could be a chance. ‘I thought, “Hang on, I might be able to do this.”’

Some mortgage advisers didn’t seem interested in the ‘curly circumstances’ of her application, she says, but she was told that working through a broker would be a good option because they would speak to a number of providers on her behalf. ‘I didn’t find that to be the case at all. A lot didn’t seem to view the benefit as income. I spoke to a few banks that were recommended to me as being a bit less risk-averse. None of them seemed that interested in me until Westpac said, “Why don’t you go to your own bank?”’

‘The mortgage brokers, when I was a single mum on a benefit trying to buy a house and living in Wellington, they didn’t seem to want to know me. They didn’t take the time to get to know my situation.’

Although Carrie had been given the impression that it was a long shot, she applied to Kiwibank, which she says was ‘actually great’. ‘They were over and above helpful, they genuinely wanted me to get a home. I don’t know if it was because of my banking history or they were hungry for more business, but it felt more genuine and connected.

‘I got a loan through them, and every day I wake up in this house and think, “I am so lucky.” All the solo mothers I know in Wellington have to move from rental to rental every year and it’s just horrific, it’s so hard on the kids.’

The bank asked about her childcare costs and how much she spent on school uniforms but Carrie was undeterred. She qualified for a Kāinga Ora First Home Grant of $5000 because the house was under the area’s $400,000 price cap. ‘I offered $415,000 and then negotiated down to be under the threshold because it needed some repairs.’

Carrie says it seemed to help that she was applying from Wellington, so the house prices in Whanganui seemed extremely affordable in contrast. The house she bought is a 1950s solid weatherboard home on a concrete pad, ‘mostly identical to all the other houses on the street. I’m not sure if it was a state house but it has three bedrooms. There’s nothing glamorous about it, it’s not a fancy villa, it hasn’t got beautiful wooden floors but it’s incredibly functional and well built.’

Carrie says she had a feeling of desperation being stuck in an insecure housing situation. ‘I’m 38, I’ve been through a traumatic time and I was wanting to provide that stability. What it’s done for my mental health and getting back on my feet . . . housing is a human right and it feels like we’ve lost our way in New Zealand. I’m one of the lucky ones and I feel unbelievably grateful.’

She and her former partner had been trying to buy a house in Wellington but kept missing out. ‘We had been in the process of making offers on places and missing out by $30,000 so we’d have to go back to the bank and increase the amount we could borrow and shuffle things around to increase our loan and then the next house we put an offer on we would miss out by $30,000. It was constant scrabbling to buy a place. Luckily it didn’t eventuate.’

Carrie fixed her mortgage for a period that runs until her youngest child goes to school. ‘The bank recommended getting the fixed rate until she goes to school so I can increase my hours when I do work.’

She says the local community has been welcoming and there are other people moving into town from Auckland and Wellington. ‘A lot of people are moving here so house prices are going up significantly. The locals seem really welcoming, although they’re not happy about house prices going up! It’s such a great town. Now I’m here and looking around thinking it would be nice to have a dishwasher . . . I don’t have the disposable income yet, I’m still looking for a job. The kids can walk to school and there are kids next door on both sides, it’s really lovely. I couldn’t have had that in Wellington in the area where my son went to school. The houses there are all over $1.2 million at the moment.’

From Renter to Owner is published by Allen&Unwin. RRP $29.99.