Read part 1 here.
Maddie (Gen Z): I’m back with more questions! Firstly, Afterpay. I’ve never used anything like it, but what are your thoughts? Should I save for an item and pay it outright, or use things like buy-now-pay-later to pay it back in smaller installments?
Emma (Millennial): Afterpay and similar schemes are tricky. On the one hand, if used as part of a mindful spending approach, paying for things in installments can be a form of reverse saving. That said, the marketing and sales tactics used by buy-now-pay-later schemes is particularly sneaky. They’ll often try and get you to buy more or buy sooner by reminding you that you can have it now and defer the responsibility until later – for millennials and Gen Zs, it’s a common trap, so be really careful.
In terms of the long-term impacts of using them, the schemes themselves don’t always run a credit check, but missed or late payments and frequent use can still impact your credit score, which could affect your borrowing capacity in the future.
Maddie: Wait, what’s a credit score?!
Emma: A credit score is basically a record of some aspects of your financial history. Any applications for credit cards or loan products will appear on your credit score, as well as missed or late payments for anything you owe.
A good credit score doesn’t automatically mean you’re great with money. You can be in a lot of debt and still have a good credit score if you pay your minimum payments regularly. What it can reflect is your credit worthiness, which basically means your history of repaying credit payments on time.
Maddie: In the future I want to be able to buy my own home – when should I start saving?
Emma: When it comes to the question of when you should start, the answer is always yesterday! A deposit for a home is a hefty chunk of cash, so the earlier you start, the less effort it requires. Plus, you’ll have more time to take advantage of compound interest, as we talked about last time!
**Maddie: Should I use my KiwiSaver (superannuation) or save separately? **
Emma: Buying property with superannuation is a relatively new option for first time buyers, and while it sounds attractive, be very careful with messing with your retirement savings. It’s also important to consider when you think you might want to buy, and what your financial situation looks like outside of your superannuation.
Generally, money can’t be accessed from your superfund unless it’s for a specific purpose, so if you wanted or needed to use your savings for something else, you might find yourself stuck.
Ultimately using super to buy property is a personal decision, but it’s really important to consider all your options before jumping into something that sounds like a great idea.
Maddie: Alright, so mortgages. How do I get myself one of those?!
Emma: Well, firstly, let’s just clarify what a mortgage actually is. A mortgage is a loan product that relates to a property you’re purchasing. You pay a percentage of the property price up front with your own money, and then a bank or lender loans you the rest. That’s a mortgage.
To get a mortgage, you generally need four things: a chunk of money saved for a deposit, evidence of genuine savings, a steady and reliable income and a clean sheet when it comes to your bank statements. Let’s dig into those a bit more.
- A deposit – it speaks for itself, really. If you’re applying for a mortgage, you’ll need a deposit of around 10-20% of the amount you plan to spend on a property. The mortgage then covers the rest.
- Evidence of genuine savings – this generally combats irresponsible spenders being gifted a sum of money and using it to apply for a mortgage. While financial gifts, inheritances and maybe even winnings can certainly be used towards a property purchase, when it comes to securing a mortgage, you’ll probably need to demonstrate some evidence of an ability to save money on the regular.
- A steady and reliable income – casual roles, being newly self-employed or being on a probation period in a new job can all cause problems in your mortgage application. That’s not to say you can’t get a loan if you’re in any of these situations, but speak to a mortgage broker for information on how best to approach an application if your income isn’t a fixed regular payment.
- A clean sheet on your bank statements – what do we mean by clean sheet? Often lenders will have a good scour through your bank statements, which you provide as evidence of your ability to repay the loan. Things like gambling, fast loans and even Afterpay and Uber Eats can raise red flags and signal a less than desirable spending profile. Don’t panic, a Friday night pizza won’t derail your home ownership goals, but frequent and irresponsible purchases could add fuel to an existing problem with your application. Stick to your budget and you’ll be just fine.
Maddie: Time to reign in my online shopping then! Right, first home – check! What about retirement?
Emma: In Australia and New Zealand we’re incredibly lucky that we have retirement savings systems in place that mean we start contributing part of our salary via our employer from a young age. The percentage that comes out of your pay each time forms your employer contributions, but that’s not to say you don’t need to contribute more yourself.
Contributing even $10 a week extra to your retirement fund can make a huge difference between now, in your twenties, to retirement age in your sixties. Plus, you can even pay less tax by sending a few extra dollars to your superfund…but that’s probably a story for another time!
