ANALYSIS: With the significant rainfall that occurred in August throughout New Zealand, it is possible that homebuyers and homeowners will face an increased level of scrutiny for houses near rivers and at the edge of cliffs from lenders.
Aside from obvious red flags such as monolithic-clad homes, banks primarily rely on home insurance to indicate whether a security is acceptable to them. This makes sense; if a house can be insured, the value will remain for the banks even if a disaster strikes.
However, since the Christchurch earthquakes and, more recently, slips and floods in the Nelson/Tasman area, banks are finding that insurance claims can take a long time to be paid. And homeowners are struggling to pay their mortgage while waiting for these payments.
If lenders decide floods or ground stability is a risk, they will follow a reasonably predictable method of risk reduction.
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The first step will be a knee-jerk reaction of simply refusing to lend to some regions of New Zealand regardless of the localised risk of flooding. The smaller the lender, the more conservative the choices will be, with the smallest lenders sticking to low-risk cities only. This will be the most frustrating time for buyers trying to purchase a home. It may be that buyers meet all the criteria for the banks, but that lender has identified a particular suburb as high-risk.
Stage two of the new flood and ground stabilisation policy will be once they have better data around the risks. This stage usually takes about six months to kick in with lenders as they get their heads around what is acceptable.
Mortgage Lab founder Rupert Gough: "It may be that buyers meet all the criteria for the banks, but that lender has identified a particular suburb as high-risk." Photo / Fiona Goodall
A big red flag will be a declaration on the Sale and Purchase that there has previously been flooding or slip damage on the property. That declaration will almost certainly trigger a requirement for a geotechnical report, or the banks may completely decline to lend on the property. For buyers this will be frustrating although the decline from the banks will only be on the property, not the purchaser, meaning searching elsewhere is required.
If you currently own a home that has been damaged in a flood or has a heightened risk of floods or slipping, it is unlikely a bank will demand immediate repayment of your mortgage. Neither the bank or homeowners benefit from a mandated sale, particularly one due to a heightened risk of erosion or flood. However, the lender is much more likely to ask for annual confirmation that you have adequate insurance cover. They will want to know that the house is fully covered in the event of a natural disaster.
If you are concerned that your house is at risk, you have three options - sell the property, increase insurance or ignore the risk (the “bury your head in the sand” approach). Obviously, the third option isn’t advisable, and deciding between the first and second may come down to your emotional attachment to your property or your financial situation.
If you are in love with where you live or, for some reason, can’t sell, now is the time to search for some high-quality insurance. Make sure you work with the insurance company to calculate the full replacement value of your property and the contents inside your property. Since the Christchurch earthquakes, house insurance requires an exact dollar amount for cover rather than just “full replacement”. This number needs to be updated yearly to ensure you’re not short when disaster strikes.
Plenty of people will fall into the “keep it and insure it” category. Cliff-edge houses inevitably have amazing views, and rivers demand a premium for the calming effect of flowing water. But the time to address the risk is before the next round of natural disasters strikes.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
