Mortgage FAQ: Would my chances of getting a home loan increase if I went to a non-bank lender?

ANALYSIS: Everyone has a bundle of questions in their head when it comes to buying a house. For first-time buyers the money part is often the biggest source of confusion and the biggest source of stress. Information is key. Getting a mortgage is about being prepared. Very few people can just walk up to the bank, ask for a big sum of money and get what they want. Most applicants work hard to get their savings together and minimise their monthly expenses. Below, I’ve compiled and answered the most frequently asked questions I get from first-time buyers. Many featured in a recent Q&A I did on social media with OneRoof and they illuminate the challenges of getting a foot on the property ladder.

Q: What are the top three things I can do now to make sure I'm ready to apply for a mortgage later?

1: Firstly, get your spending under control. You’ll need to show the bank that you are in control of your expenses over a three-month period, so this is one of the first things to attack. Although the banks can now take a realistic view of what expenses will be after you’ve bought (due to the CCCFA being altered), it is still easier to just show them that you’re good with your money.

2: Minimise your secondary debt such as credit card limits and Buy Now Pay Later. The banks have to assume you’ll max out your credit cards to their limits and continue using the buy now pay later facilities. If you’re not using them or don’t absolutely need the limits, get rid of them. These eat up your borrowing capability a lot.

3: Set your expectations. Your first home does not have to be your forever home. The first step is about getting onto the ladder.

Bonus tip: research the common bank and property phrases such as LVRs (Loan to Value Ratios), OCR (Official Cash Rate), DTI (Debt to Income ratios), stress-test (the higher interest rate at which the banks test your mortgage affordability)

Most of the tips above are related to your income. This is because income is a more confusing bar to meet, whereas your required deposit is a hard line in the sand – typically, 20% is good, 10% is OK, and 5% is possible with the Kāinga Ora First Home Loan.

Q: Should I wait for prices and interest rates to drop or buy now?

With buyers out of the market, you've got a much better chance of finding a good deal today than exactly timing the bottom of the market. You can always put offers on properties you think are a good deal at any point in the market cycle. Property ownership is a long-term thing, so don't worry about what the market will do in the next few months.

It might help to cast your mind back to a year ago. The biggest frustration was that buyers were up against 20 or 30 others in a tender or auction. Now that has all changed, so if you are approved for finance, take advantage of this lull.

Additionally, our research shows that, despite property dropping by -5% on average across the country over the past three months, lending is actually more complicated now than it was then due to higher interest rates. In other words, waiting for lower prices for property doesn’t always mean it is easier to buy.

Q: Would my chances of getting a home loan increase if I went to a non-bank lender?

Banks are typically the cheapest way to get a mortgage but have a higher bar. But alternative lenders, usually called second-tier lenders, have more flexibility – poor credit, alternative income sources etc – but charge a slightly higher interest rate.

It’s hard to definitively tell you how much extra you will pay in interest at a second-tier lender. The pricing they offer depends on the risk you pose, so it can vary (a lot). What is interesting to know is that the lowest risk applicants – the ones who fall just outside of the bank policies – may only pay 0.5% to 1% more than a standard main bank. If the goal is to move back to a bank in a couple of years, the additional cost is not a lot overall and allows someone to purchase a house sooner.

Q: What is the best way to structure my mortgage?

There are two types of mortgages – fixed and floating (it’s essential to recognise that the rules around floating vary at different banks, though).

The main advantage of a floating mortgage rate is that you can make additional payments at any time with no penalty. Additionally, in a market where interest rates are going down quickly, floating rates may end up cheaper.

Mortgage Lab founder Rupert Gough: “Property ownership is a long-term thing, so don't worry about what the market will do in the next few months.” Photo / Fiona Goodall

Currently, about 85% of NZ mortgages are on a fixed rate, with the majority of those on the shorter (1-2 year) term. In this current environment, homeowners are using floating mortgages to store their salary and make small extra payments while fixing a large portion of their mortgage over a year or more.

Q: How long should I fix my mortgage for?

How long you fix your mortgage for, like a lot of monetary decisions, depends mainly on what helps you sleep at night.

Shorter-term mortgages (1-2 years at 5%-5.25%) suit those looking for lower regular payments because the interest rates are cheaper. Longer-term mortgages (3-5 years up to 6%) are for those wanting to know precisely what they will be paying over a longer time period.

We are in a strange economic position at the moment, and it’s very difficult to predict where interest rates will be in a year or more. Most economists are putting their bets on interest rates being about 1% higher, but controlling inflation and a calming of issues such as the Russian/Ukraine crisis and Covid-related production issues will significantly affect our interest rates. Not many economists see it getting worse than 1% higher than the current interest rates.

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