How to get around the home loan restrictions – buy new

ANALYSIS: A lot has been made of the new mortgage lending rules in the past six months. Changes as a result of the CCCFA have made it more difficult for homebuyers to borrow, with the anecdotal evidence pointing to applicants losing about 20% of their borrowing power. That means a borrower who had a pre-approval for $1 million six months ago might be looking at around $800,000 now.

But that reduction isn’t hard and fast for everyone and depends on the property being purchased and an applicant’s situation, particularly for low deposit borrowers (those with less than 20%).

The best example is low deposit borrowers having more borrowing power for newly built houses than they do for existing properties. It’s true that banks have restrictions on how much they can lend to buyers of existing properties, with only 10% of their total lending allowed to go to low deposit borrowers. But your deposit isn’t what I’m referring to. The same income can get you a larger mortgage on a new home than it can on an existing home.

At first glance, this doesn’t make sense. A million-dollar mortgage has the same payments whether you live in a new house or an older house.

There are a couple of things at play here. On one hand, the banks are under pressure to show that they lend responsibly, which means assessing applications harshly. This requires the applicant to have “x” amount of dollars left over after their monthly expenses and after their mortgage payment (usually calculated at a rate of around 7%). It varies from bank to bank (and to be honest, week to week) within any particular bank, but for this example let’s use an amount of $1000. In other words, after the mortgage payments and the regular expenses have gone out, a bank might want to see $1000 left over from the applicant’s income in order to purchase an existing house. However, if that same person was to purchase a new house, the bank would need significantly less left over per month.

Rupert Gough: “The same income can get you a larger mortgage on a new home than it can on an existing home.” Photo / Fiona Goodall

This comes from the other pressure that is being put on banks: to encourage purchases of newly built houses. The bank's answer to this is to set a different measure of your income depending on the property.

How much of a difference? At quite a few banks, the difference works out to be around $110,000 more of borrowing. Meaning someone could purchase a new house worth a $1m and an existing house worth around $890,000.

From a risk point of view, this makes sense. The additional interest on $110,000 of mortgage is around $4,400 per annum and this is well within the range of the cost of repairs that an older home might need but a newer home won’t.

It’s worth noting that because of the way different building contracts are presented, this affordability benefit applies more to turn-key developments than to progress payment contracts, however, there is still some benefit with those too.

For those struggling to find a property in their price range, it’s worth talking to the bank about what the difference would be if you were looking at new build homes. Once you know your affordability for those, see if there are developments that meet your needs.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.