Cast your mind back 14 years. In New Zealand in 2006, house prices were increasing at a rate of knots and showed no sign of stopping. Some banks were offering 100 percent-plus mortgages, and there was no fear because properties were continuing to increase in value.
Then the GFC came along and the party abruptly stopped. In 2008, houses weren’t selling and the certainty of capital gain disappeared.
Once the dust had settled, the Reserve Bank decided that having interest rates as the only mechanism to control house prices was not effective. And so in 2013, the Reserve introduced loan to value ratios (LVR) as an alternative method of control.
Under the new restrictions, a bank could only lend a certain percentage of their mortgage book to borrowers with high LVRs. This was called a "speed limit", for no apparent reason, and meant the Reserve Bank could not only adjust the amount of funds available - giving the banks more or less money to lend to high-LVR borrowers - but also adjust the point at which an applicant became a high-LVR borrower.
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Fast-forward to the present, and Covid-19 has rewritten the rules on mortgage applications. Previously, producing three pay slips or your latest set of business financials was enough to convince the bank that you had a solid income source. You could show your last two bonus payments and the bank would assume it was a trend. And showing your KiwiSaver balance meant you had proven your deposit and no further questions were asked for six months.
But banks now are asking harder questions about your ability to repay a home loan. Will you still be employed at alert level 2? What does your business sell or produce? What are your revenue forecasts for 2020/2021? Previously, as a mortgage broker, I have only had to answer questions like this for applicant in certain twilight industries. While the amount you earned last year is a good indicator of your income, banks need to be satisfied with your income levels this year and next.
Economists are rightly worried about the impact of rising unemployment on house prices. And it's against this backdrop that the Reserve Bank decided to remove the LVR restrictions. (The Reserve Bank must be relieved that it had another lever or two to pull to spur the housing market. Being solely reliant on lowering interest rates would have been ugly when the OCR is already just 0.25 percent.)
The LVR changes won't change the banks' appetite for risk but they will affect how Kiwis get a mortgage (in a good way).
Pre-approvals for high-LVR borrowers have, for the past two years, been almost impossible except with the institution they are currently banking with. This is because the banks had to assume a pre-approved applicant was going to turn up in the future, Sale and Purchase in hand, and ask for their mortgage to be drawn down. The banks had their “speed limits” in place and so pre-approvals could quickly get out of hand.
The best method of being funded was to arrive at the bank or mortgage broker with a signed and accepted Sale and Purchase and then submit the application to the bank. This is known as a Live Deal and involved the following stress-cocktail: pressure from real estate agents, slow turnaround times from the banks and a mad scramble to get a valuer to your property in time.
Now that those LVR speed limits have been removed, you can expect the banks to start offering pre-approvals to clients even if they don’t bank with that institution. This is amazing news for buyers, particularly first home buyers. Kiwis can now go to the bank that best suits their financial situation rather than only having the option of their current bank.
Don’t think the Reserve Bank has fired all its bullets by removing the LVR restrictions either. Debt to income restrictions, where more income is required for a mortgage, could be introduced if the market does become heated again.
- Rupert Gough is the founder and CEO of Mortgage Lab
