OPINION: With Auckland in a level three lockdown and the rest of the country at alert level two, the banks will be keeping a close eye on economic predictions for the rest of the year and for 2021. If the lockdown is extended for more than a week or two, Kiwis should expect applying for a mortgage to become quite a bit harder.
The first thing all banks will most likely change will be the loan-to-value ratio requirements - the percentage you can borrow on a house. An extended lockdown will put the housing market back into uncharted territory. Banks will be hesitant to lend at 90 percent if their economists think there will be a 10 percent drop in the market. It’s far more likely they will only allow applicants to borrow 80 percent of the sale price.
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The 80 percent rule has long been the safe space where banks are happy to lend without many restrictions. It would surprise me to see them change this (ie; require even more than 20 percent deposit) but it would depend on how dire the economic predictions are.
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Buyers could also expect extra scrutiny around income. For as long as I can remember, banks have looked at applicants' past earnings - for salaried employees, what they earned over the past few months; for self-employed applicants, what they have earned over the past few years.
But the world has changed and the key question applicants will have to answer is: “What does your income look like going forward?”. And banks will be assessing which industries are most at risk from a second extended lockdown.
If you are employed, the key to successfully proving your future income will be showing the steps your employer is taking to continue trading. Clearly describe how working from home is being implemented and how income will continue to flow to your employer. This is easier for public servants but, for private companies, this will be something that will need to be communicated from their management.
Self-employed applicants will need to prove how their business will continue to earn money through another lockdown. Some successful methods we have seen is the implementation of online sales and the negotiation of expenses such as office rent etc. They will need to have an accountant produce detailed forecasts and make copies of any contracts that prove regular income.
At the end of the day, if you are unsure of your income don’t, progress with a mortgage application at this time. Continue to build up your savings buffer and wait until things have returned to normal (or as close to normal as we can get these days).
The banks are walking a tightrope at the moment. Making finance too difficult to obtain will cause the very thing they are afraid of - a property market crash. Lack of approved buyers will be a leading cause of property prices to drop.
But giving mortgages away too easily is setting clients up for failure and is financially irresponsible. Clients who have a good deposit and strong future income should always be able to purchase. If you’re not quite in this position, keep saving and look to secure your income as much as possible.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
