COMMENT: The Reserve Bank’s announcement yesterday that will further tighten Loan to Value Ratio (LVR) restrictions at first appears to be yet another blow to first home buyers.
Currently, banks can to lend up to 20% of their funds to low-deposit borrowers (homeowners with less than a 20% deposit). In other words, if a bank lends out $1 billion in a month, $200m of that can go to low-deposit borrowers. After the November 1, the available lending reduces to just 10% of the overall funds.
However, banks have been staying clear of the 20% threshold for some time now (Reserve Bank figures for July show they lent just 11% of their funds to those with low-deposits), so it’s unlikely the average buyer will notice a move to 10%.
Instead, they may be blind-sided by changes to Credit Contracts and Consumer Finance Regulations (CCCFA), which take effect on December 1.
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The new CCCFA rules will require banks to go through every mortgage application with a fine-tooth comb. For example, if you were spending $600 per month on takeaways, that’s how much the bank will plug into their calculator for your mortgage. Telling them you are going to change won’t help. Past spending habits will be the only proof you have of your financial character and this will, unfortunately, cut some applicants out of the mix.
It’s important to note that these CCCFA changes are a good thing for homebuyers. Borrowing hundreds of thousands of dollars should require that applicants have a good understanding of where their money goes every month. Not just an understanding, at that, but to actually practice good money management.
For first home buyers, both changes will seem overwhelming. But there are practical steps low deposit Kiwis can take to minimise the effect of the new LVR restrictions on their application:
1: If you can get to a 20% deposit with help from the Bank of Mum and Dad, consider this as an option. LVR restrictions will no longer be a hurdle for you.
2: Consider buying a cheaper home or an apartment. One of the simplest ways to get to 20% threshold is to move out of higher price brackets, so if you were looking at $900,000 homes, then look at what you can get for $800,000.
3: Are there new-build properties in your price bracket? Newly-constructed homes are exempt from the LVR restrictions so this may be an option to look at.
4: Ensure you and your partner are banking at different banks. Banks will prioritise their own customers so having accounts with two different banks will mean you now have two options to approach first. These accounts typically need to receive your salary into them to count as a “client of the bank”.
5: Banks also prioritise “live” deals – i.e. deals that have been accepted by the vendor. Ask your bank or broker to estimate your approved amount and try to get an offer accepted on a property, subject to finance of course. Try to avoid auctions (tricky in Auckland, I know). Deadline sales and sales by tender are a good option, if possible.
6: Consider non-bank lenders for a year or two. This option is more expensive but may mean you are able to get into your own home sooner. Be sure to understand the additional costs that these lenders come with and make sure it is within your risk tolerance
7. Lastly, bear in mind that the amount of money the banks have to lend to low-deposit borrowers fluctuates from week to week. If you are a good applicant but have been declined because there is no money to lend, keep in touch with your bank or broker to see if the situation changes.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
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