NZ: Changing Lending Criteria

Mortgage rule move will force buyers out

The days of 5 per cent deposits for homes could soon be over as the Reserve Bank contemplates enforcing strict lending criteria.

Sunday Star Times,

13 May, 2012

The changes could require first-home buyers to save larger deposits, and restrict the ability of existing homeowners to increase their mortgages to buy more expensive properties, or to top them up to use the money for other purposes.

Maximum loans to 80 per cent of a property's value were once common, requiring buyers to find 20 per cent deposits, but during the last property boom, banks lent up to 100 per cent. The 80 per cent limit was reintroduced as the 2008 credit crisis bit, but has since eased, with most banks now offering 95 per cent mortgages.

Reserve Bank deputy governor Grant Spencer has said the bank is considering introducing limits on the loan-to-value ratios banks use.

But mortgage broker Mike Pero said he would be "surprised" and "disappointed" if the Reserve Bank put a limit on mortgages.

"If it did happen it would have a significant impact on home loans, and especially first-home buyers."

He said the move would also impact property values. "Coming out of a financial crisis, where banks continued to lend to 95 per cent, I'd be disappointed to see that change."

If 80 per cent limits were imposed, average homes would become unaffordable for many. "You would need $80,000 for a $400,000 home, and most would struggle to find it."

The move is one of a number of measures being considered to rein in credit policies, and while it would force first-home buyers to save more, not everyone sees it as a problem.

Rebecca Haden – a sustainable transport co-ordinator who is looking for a first home with her musician husband David – said it could save people from future financial blowouts. "We couldn't do it if we needed 20 per cent ... but I think it makes sense," she said.

"A 20 per cent deposit is $70,000 for a $350,000 house. That is way off, we probably have a quarter of that. It would mean we wouldn't be able to buy, but maybe it's safer. Maybe it's better that they aren't lending ... I guess it's what caused the problems to start with."

Nervousness over owing banks a sizeable loan had delayed the Hadens' dream of owning their first home. She said given the volatility of the market, she was wary of owing more to the banks than what their home was worth.

The pair now rent, but their joint income exceeds the threshold for a Welcome Home loan, which allows people to borrow up to $200,000 with no deposit, or up to $350,000 with a 15 per cent deposit.

The Hadens have been monitoring the housing market for about three years. They realised suburbs surrounding central Auckland were out of their price range and were now looking for property in West Auckland. "It might bring the prices down," Haden said.

"First-home prices have been on the increase in the last six to eight months, from what I've been reading. It will just mean a lot of us won't be able to buy anything. It might slow down the market and help bring prices down, and that would be good for me."

When the 80 per cent limit was reintroduced in 2008, it constrained the housing market and caused cashflow difficulties for some small business owners, who used their homes as security for business loans.

But Real Estate Institute chief executive Helen O'Sullivan said encouraging people to have a decent deposit when buying a property was a good thing, and that a loan-to-value ratio limit might help prevent future house price bubbles.

"The reality for all first-home buyers is that it's always difficult to get the deposit. But the less equity you have, the more at risk you are to variations in your personal circumstances."