New home lending rules could make life more difficult for New Zealand’s self-employed workforce, locking some out of traditional mortgages altogether, a leading mortgage broker has warned.
The Reserve Bank of New Zealand has indicated that it will require mainstream banks to impose debt-to-income ratios (DTI) on customers, to reduce risk in the housing market.
Under the proposed rules, buyers would only be able to borrow a set multiple of their income (six for owner-occupiers and seven for investors).
For example, an owner-occupier buyer who earned $82,576 a year (the nationwide average annual wage, according to the latest Stats NZ figures) would be able to borrow a maximum of $495,000.
Start your property search
Read more:
- No reserve auction: Could someone pick up this Auckland house for free?
- Tony Alexander: Unfounded rate hike rumours put brakes on the housing market
- Auckland couple selling the family home to fund round-the-world trip with their kids
The RBNZ’s deputy governor Christian Hawkesby has said the controls “will reduce financial stability risks” and “support house price sustainability”.
However, one mortgage adviser told OneRoof the new rules could pose significant challenges to self-employed Kiwis, such as contractors, business owners and tradies.
Jeff Royle, of iLender, said self-employed borrowers already jump through extra hoops to prove they have sufficient income for a mortgage.
“To be a self-employed person and get a bank loan, it’s harsh. The only time [self-employed people] are really served well by the bank is when it’s in the interest of the bank to serve them well,” said Royle. “I call them fair-weather friends.”
Self-employed borrowers fall into two camps, said Royle. “The first camp is ‘verified’. These people can provide to a lender’s satisfaction two years of financial accounts. That’s the equivalent of showing a pay slip.”
These borrowers were unlikely to be affected by DTIs any more than those earning a salary, he said.
But not everyone qualifies for verified mortgages. Newer business owners or those with lumpy incomes have to apply for unverified alternative mortgages – also known as “alt-doc” mortgages – from non-bank lenders, which typically charge higher interest rates and are not subject to the same rules as retail banks.
Reserve Bank Governor Adrian Orr. The RBNZ plans to bring in debt-to-income ratios to reduce risk in the housing market. Photo / Getty Images
To qualify for an alt-doc mortgage, the borrower’s accountant signs a certificate verifying the clients’ income, said Royle. “They may also be required to provide a GST statement, which shows that they are running a business properly and filing returns on time to the IRD [Inland Revenue Department].”
Many borrowers who choose the unverified route frequently re-mortgage their loan with a mainstream bank after one or two years, having shown they can manage a mortgage.
This could become more difficult or even impossible if DTIs are brought in. Royle said unverified borrowers may never be able to meet the DTI requirements to move back to a mainstream bank even though their income and expenses meant they could afford a mortgage.
Banks have some flexibility currently when they crunch the numbers for borrowers, although it’s not clear whether that will be extended to DTIs. At the moment they can assess a borrowers’ character and make a judgement of whether that person would be a good bet.
They can also add back into an income calculation deductions that have been made for business expenses, such as vehicle and home office costs. That has the effect of increasing the self-employed people’s income they are judged on.
On the other hand, the bank may choose to take a percentage of the self-employed person’s income off. That also happens with property investors who declare rent. The bank may not take into account the total rent on their portfolios when calculating if they qualify to borrow more under DTIs, Royle said.
The other option for self-employed people may be to buy brand-new homes, which might be excluded from the DTI rules in the way they’re excluded or treated more generously with other types of lending restrictions.
Use the search field to find out the best mortgage deals available today.
