Mortgage timebomb: Do you meet the savings threshold?

A US study has found that borrowers with less savings than the equivalent of one mortgage payment have a higher default rate than those who have savings enough to cover three or four months of mortgage payments.

The study by the JPMorgan Chase Institute found that cash in the bank is more important in preventing default than the size of the deposit.

Deposits requirements in New Zealand are robust so aren't the issue they are in the US, where the median deposit for first-home buyers last year was just seven percent.

It's striking to note that the JPMorgan Chase Institute research highlights having cash in the bank to cover three mortgage payments was more important than the amount of home equity, the income level of the homeowners, or the size of the mortgage payment in relation to household income to prevent default.

It has relevance to the New Zealand market where the amount mortgage debt buyers are taking on is an increasing concern.

The average mortgage in New Zealand is about $514,000, with Reserve Bank figures pegging the country's total mortgage debt at $265.7 billion, up 6.3 per cent in the year to May and up 38 per cent from $191.9 billion in 2014.

In the US study, borrowers with less savings than the equivalent of one mortgage payment had a three-year default rate (1.8 percent) that was more than five times higher than borrowers who could cover three months of mortgage payments.

Homeowners who had lacked the cash to cover one mortgage payment accounted for 20 percent of the people surveyed but made up 54 percent of those who defaulted on their loans.

Mortgage Lab Rupert Gough says it's likely that 50 to 60 percent of Kiwi mortgage holders would not have enough savings in the bank to cover three months of repayments. "And that's a disturbingly high figure," he says.

Gough says banks assess the savings of mortgage applicants - the magic amount is 5 percent genuine savings. However, borrowers typically lack a buffer during the first year of repayments, which is known as the risk period. Brokers, he says, now work to factor that in.

- With the Washington Post