With New Zealand house prices hitting record highs, buyers face the prospect of taking on sizeable debts to get a foot on the property ladder.
Even those who own a home and are thinking of trading up could end up adding several hundred thousand dollars to their loans.
But brokers say this is still affordable – for some.
“Buyers at the upper end of the market who are typically borrowing another $1 million or more would have to have a combined income of $250,000 to service the debt,” says John Bolton, owner of Squirrel mortgage brokers.
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“That sounds like a lot, but in Auckland home-owner household incomes are quite high.”
Bolton says that Kiwis will stretch themselves for nice houses and holidays, rather than saving.
“What rescues or helps the worst of us, is that the housing market has kept going up. The rising market makes us feel richer. We’re not good a paying down debt.
“That’s most Kiwis’ modus operandi – buy a house, hold on to it, hope like hell it keeps going up.”
Financial planners say make the long term plan before rushing into housing upgrades and more debt. Photo / Getty Images
Bolton says that borrowers should do their math on interest rates, rather than paying down the principal.
“Paying down the principal is like forced savings, as it is increasing your equity. The cost of ownership is in the interest payments.
“The interest costs on a million dollars are only $25,000 a year – and if your house goes up by even just one or two percent a year, you’re way better off. If you were renting a good house in a good suburb you’d be paying $1100 in rent, that's $60,000 a year, gone. “
Bolton is careful to add that, even though interest rates will likely stay low for the next three years, banks and brokers stress test borrowers to check they can still comfortably afford their loans if interest rates went to 6 percent.
He admits that $1 million is still a big number and a bit of a psychological barrier, but compares it to earlier generations who saw $100,000 as a barrier.
Hannah McQueen, author, financial adviser and managing director of EnableMe. Photo/ Doug Sherring
“Just think what that figure will be in 10 or 20 years. But we’ve all stretched ourselves to buy a house, scrambling in the car ashtray to pay for dinner. That hasn’t really changed.”
Financial advisor Hannah McQueen of Enable says not so fast on upping the borrowing.
“I’ve talked many clients out of taking on another $500,000 or $1 million dollars of debt.
“Or rather, I’ve convinced them that it makes sense to change the order of their plans so that we can get a wealth plan in place first that will unlock the nicer house without the accompanying pressure of enormous debt.”
McQueen says that when people have clarified their financial goals and the strategy to reach them, they are willing to delay the big upgrade and not worry about what everyone else is doing.
“It’s about understanding their goals, what the options are, their opportunities and constraints, their risk tolerance, readiness for retirement and savings cadence to determine what’s possible, and then designing a strategy they can buy into.
“When you have a plan and you’re in control that’s when you can sleep easy.”
She says that whatever you’re earning, a mortgage over $1 million dollars is always going to be overwhelming debt to pay back.
“Expensive properties are usually accompanied by expensive lifestyles, which can create a bit of a financial prison. You need to keep earning as much, if not more, than you currently are, just to stand still.
“And that doesn’t take into account rising interest rates, a drop in income or a curveball. That’s exhausting, if not very stressful.”
Mortgage broker and OneRoof columnist Rupert Gough, CEO of The Mortgage Lab, says that an easy rule of thumb for borrowing is to divide the amount of debt by five.
“So, if you’re borrowing $700,000 to $850,000 you’d be looking at a joint income of $150,000. That might be two people earning around middle management/upper admin [salaries] of $80,000 each.”
Reserve Bank of New Zealand figures for September last year (the most recent update) show that while 15 percent of new mortgages to previous and existing homeowners (excluding investors) were taken out by households with a gross income less than $90,000, the borrowers with gross incomes over $190,000 accounted for one third of the value of new loans.
For first home buyers, that's reversed: 22 percent of new mortgage dollars were to households earning under $90,000 and just 12 percent to borrowers with gross incomes over $190,000.
Gough says that while at least 75 percent of first home buyers are helped by the bank of mum and dad, trading banks still require evidence that borrowers have saved at least five percent of the loan - on $1 million, that’s $50,000.
Movers, he says, can more comfortably add to their mortgages because, as well as earning more, they’ve probably paid down some of their earlier mortgages so have more equity in their next property.
“If you’re thinking about moving in this market, then take advantage, but you will have to borrow more to climb to that next step on the property ladder.”
McQueen is less enthusiastic about adding to a mortgage.
“The problem is that these borrowers don’t necessarily have savings, the bank is just taking the view that as their fixed costs rise with a bigger mortgage, their discretionary costs will shrink to compensate – which is a dangerous assumption when you don’t have evidence of that.
“While a large loan is pretty cheap at the moment, it won’t always be. Most people don’t have a plan to pay that debt back quickly, and certainly not within the next five years when conditions are at their most favourable."
Her advice?
“It’s important to model the options: sometimes renovating makes sense, sometimes selling makes sense, and sometimes buying an investment property with a view to using the future gain on that property to help reduce the debt on the home makes sense.”
