ANALYSIS: Higher interest rates and a shake-up of borrowing rules in 2021 have made the last two and a half years some of the most difficult for Kiwi borrowers, but it looks like getting a mortgage will soon become easier.
In the past couple of months, interest rate deductibility has returned for investment properties, the loan-to-value ratio rules have been eased for owner-occupiers and investors, and the onerous restrictions of the Credit Contracts and Consumer Finance Act (CCCFA) have been removed.
And this week, the Government’s tax cuts come into effect. Kiwis will get more money in their pay packet, which means the banks will be willing to lend slightly more.
A person wanting to buy their first home could borrow up to $21,500 more under the bank’s income tests after the change. That assumes that both members of a couple get $20 a week extra. It’s a small amount, but it could push some borrowers over the line.
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Property investors will be able to borrow slightly more as a result of the tax cuts. That’s because when they buy a rental property, they also get more rental income. A couple wanting to buy an investment property could borrow up to $32,000 more under the banks’ income tests now the tax cuts have come into effect.
The shake-up of the CCCFA will also have an impact.
The new version of this law came into effect in December 2021, and resulted in an outcry from borrowers, with some declined because of money spent on takeaway coffee, Kmart or Uber Eats.
From July 31, banks have more discretion when deciding whether or not someone can afford to take out a loan. Westpac already changed its criteria ahead of the shake-up, and won’t include a rental property’s rates, insurance, and body corporate fees in their calculations.
My estimates show that a property investor might be able to borrow an extra $80,000 to buy a rental property through that bank.
It has a double benefit for existing property investors. As a broad rule of thumb, you might be able to borrow an extra $80,000 for every rental property you own because of the rule change.
Though, this won’t have any impact on first-home buyers at this stage.
Opes Partners resident economist Ed McKnight: "Property investors will be able to borrow slightly more as a result of the tax cuts." Photo / Fiona Goodall
The bank’s lending tests are notoriously complex. So this estimates are a broad simplification. In all of these examples, a borrower would still need enough of a deposit.
These changes can have an accumulative effect. For example, two weeks ago a bank let an investor borrow $500,000 for a property purchase. That investor might now be able to borrow $610,000.
The next change that will likely make it easier to buy a house is a drop in servicing test rates. When you get a mortgage from a bank, you might end up paying a 6.5% interest rate. But the bank will test you at a higher interest rate, around 9% currently.
That higher interest rate is called the “servicing test rate”. The bank wants to know that you can still afford the mortgage even if interest rates rise. But interest rates are now falling. Many banks have dropped their one-year fixed interest rate by 0.5% since the start of the year. As interest rates fall, those servicing test rates will drop too.
If test rates fell to 8%, a first-home buyer who previously could borrow $500,000 would now be able to borrow $550,000 – $50,000 more. If test rates dropped to 7%, that same first-home buyer would be able to borrow close to $605,000.
The servicing test rates haven’t fallen yet. When they do fall, it won’t happen overnight. But over the next 12 months, they will likely drop, which will make it easier to get a mortgage from the bank.
It’s also important to note there are rules pulling the other way. The Reserve Bank activated the debt-to-income (DTI) ratios at the start of July, which ties the amount a person can borrow to their income.
At the moment, DTIs are unlikely to have an impact on a person’s ability to borrow. While 20% of each bank’s lending can be at a high DTI level, interest rates are so high there isn’t a lot of high DTI lending going on.
But at some point, high interest rates will stop being the constraint to borrowing, and the DTIs will take over.
In the meantime, all these rule changes will still make it easier for Kiwis to borrow to buy a house.
- Ed McKnight is the resident economist at property investment company Opes Partners
