How to secure a home loan when the bank says NO.
Over the 6 months there have been a lot of changes in the world of finance. Particularly when it comes to securing a home loan. Barfoot and Thompson Remuera Branch Manager, Carolyn Vernon sat down with Hilary Johnson, a Senior Mortgage Broker from Luminate Financial – and asked how these changes are affecting buyers and vendors, and what can be done to increase the chances of securing that all-important loan.
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We’re in a really interesting time – you could say a perfect storm is making the borrowing scenario more challenging for consumers.
In November last year the Reserve Bank amended the Loan to Value Ratio rules. This decreased the amount of low deposit loans a bank could hold from 20% to 10%. Effectively, banks had to shut the doors to low deposit lenders.
Then in December, there was a change in legislation to the Credits Contract and Consumer Finance Act (CCCFA). The law was designed to protect borrowers, but unfortunately it means the people that would be been previously approved, were no longer eligible for a home loan.
In the background, the Reserve Bank is also reviewing changes around debt to income ratios. Although the change is not set in stone, two banks have already implemented it. Essentially a lender is allowed to borrow up to 6 times their income – for example – if you $100,000 – you’ll have a strict borrowing limit of $600,000.
Together, these three changes have significantly affected the flow of credit and people ability to borrow. And that’s before we think about increasing interest rates, rising inflation and the impact of Covid!
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There’s a lot of rhetoric from the government about assisting first home buyers to get in homes, but all we see are policies that disadvantage them.
My first advice is save, save, save!
Save like your life depends on it. Cut out the coffees, the takeaways – it all helps – that money can go into ta deposit and it shows the bank you’re a responsible lender.
Also get into Kiwisaver as soon as you can – it will be hugely helpful when it comes to buying a first home.
And we suggest you start your saving plan 3-6 months prior to applying for a loan, so you have a ‘clean’ track record when the application is made.
If your parents can help that can be huge too. The bank of mum and dad has saved many a young home buyer and we love that this inter-generational assistance is part of the Kiwi psyche.
The other thing you can think about is pooling your resources. For example - this could be brother and sisters going into a house together, combining incomes and deposits to buy a home that would normally be out of reach.
Short term consumer debt is a big no-no. Higher purchase, credit cards, buy now pay later – they all do a lot of damage to your mortgage application.
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Thank goodness for nonbank lenders! Unlike 20 years ago, the non-bank lenders we have today are responsible and well-resourced. We are seeing huge growth in that area of the finance industry and they are filling a gap for many Kiwis that are struggling to meet the criteria of traditional banks.
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In a word yes. Discretionary spending has become a more important part of lending criteria. In the past banks accepted that people spent part of their income of fun things – but trusted them to pull back once they had mortgage obligations.
This worked, but now banks are being asked to look through every line of an applicant’s bank statement – and it is making things difficult and it’s making the whole process longer too.
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It’s a challenge. We need to remember that banks are cashflow lenders. Even though this group of people have equity and savings, which are important, the banks first priority is income.
For example, if a couple in their mid 50’s want a 30 year mortgage term, the bank is going to say, hang on, how are you going to service this loan in your 80’s after your main income stream is gone.
There are ways around it. For example, we can tailor an exit strategy. Say a couple have rental properties, we can show the bank that when they’re 65, they can sell those assets to repay the debt.
Another option to consider are second tier lenders who will allow you to borrow against the security of a home – as opposed to income.
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We’re lucky that in New Zealand you have both those options available. By all means approach a bank direct – there is certainly no harm in doing that. But just remember that the way you present your application is critical in the current climate.
Or you can engage a mortgage professional who’s been doing this for decades. They’ll package up your application, so it has the best chance to get approved. We make sure we’ve met all the laws, answered all the questions and the banks appreciate it, because it makes their life easier.
Remember, it matters how you ask for money!
A professional mortgage advisor will also look at the structure of your loans – which can save you tens of thousands of dollars over the term of the loan.
On top of that it costs an applicant nothing to use a broker. Plus you’re building a relationship with one person who knows your situation - whereas bank staff do come and go.
