COMMENT: The recent CCCFA changes in consumer lending, particularly with regards to applying for a mortgage, have brought about some unintended consequences to home buyers. A small number of applicants who, just three months ago, were pre-approved for a mortgage have now found themselves unable to meet the criteria. Upgraders are increasingly finding they don’t meet the criteria for a mortgage that they have already been paying for several years.
Some of the strangest and most frustrating mortgage lending policies have actually been around for a long time, though. Here are three of the quirkiest policies I come across on a regular basis. Not all of these policies apply at all banks but they all occur with at least one bank in New Zealand.
1. Flatmates: When purchasing a property, home buyers, particularly first home buyers, can look for additional income from a flatmate or two. The banks have various policies around this with the majority preferring low deposit borrowers (borrowers with less than a 20% deposit) to be able to pay the mortgage without the need for any flatmate income at all.
For those who intend to have flatmates, at least one bank likes the applicant to have a confirmed flatmate in writing at the time of pre-approval. In other words, before you’ve found a house, before you even know if you’re approved at all, you need to have someone, typically a friend, agree to move in with you. If you’re building your home - a process that can often take 18-24 - getting a solid commitment from a flatmate is almost farcical.
Start your property search
2. KiwiSaver: Regular readers of my articles will know I like to boil mortgage applications down to two simple hurdles: deposit or income (sometimes referred to as “your money or your lifestyle”).
If you have a suitable deposit but are struggling to get your income high enough to meet the bank’s lending criteria, contributing to KiwiSaver can actually hurt your chances.
This isn’t the bank’s fault, to be fair. Because of the massive additional benefits (e.g. employer contribution matching, government contributions etc.) that KiwiSaver brings with it, it’s not a good look for a bank to demand that you stop your contributions in order to pay your mortgage; from a purely financial perspective, saving for retirement with KiwiSaver is very, very worthwhile. But those regular contributions must be taken into account in your mortgage application and they therefore reduce the amount of income that can be used to pay your future mortgage.
There’s no one-size-fits-all solution to this. My gut feeling is that banks could have more flexibility towards KiwiSaver payments and mortgages but I can understand why they want to avoid the minefield altogether. If you are struggling to get your income high enough to purchase a house, it may be worth seeking advice around what temporarily pausing your contribution will cost you (in lost benefits over time) versus gain you in additional mortgage-borrowing capability. You can then decide whether it is worth it for you.
3. High interest debt: our third and final quirky policy also relates to those borrowers who are struggling to prove enough income to get a mortgage, specifically those with multiple secondary debts (e.g. hire purchases, car loans etc.).
Typically, paying off the debt with the highest interest rate first is best. In other words, get rid of the debt that is, say, 20% per annum before you pay off a loan that is on 5% per annum.
But what if the 20% per annum loan was being paid off at $50 per month and the 5% per annum was being paid off at $1,000 per month?
In a standard mortgage application, the lenders don’t necessarily factor in how much interest is being paid in a year; only what is being paid out of your income. So if you are facing the “income hurdle”, it’s possible that paying off the 5% debt would put you in a better place to apply for a mortgage (freeing up $1,000 per month of your income) than paying off the higher 20% debt - assuming paying off that debt didn’t eat into your house deposit, of course.
It’s worth seeking advice before paying off any sort of debt because some loans come with steep break-costs but, in general, if you are struggling to prove enough income, paying off the debt that takes the most out of your paycheck helps your mortgage application the most.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
