Historically as an industry we have been advocating for banks to make getting into a home in New Zealand and buying property a little less of a dream in the distance, and more of a tangible and doable reality for Kiwis.
In the past few months, we’ve seen some monumental movement in the right direction from the removal of LVR restrictions to banks battling with one another for the lowest interest rate on the market. However, in the past few weeks we’ve seen one of the most important changes yet; the narrowing of the margin between home loan servicing rates and testing rates.
In this blog, we’ll go over what that means for the average Kiwi buyer, and the various shifts in the market that have allowed such an important change to occur. As always, if you have any questions, you can get in touch with our team and we’ll happily help out.
The Ease of Taking Out Credit
Before getting into the servicing level changes, it’s important to understand the role that the removal of LVR restrictions has had on the ease of securing credit. Before COVID-19 hit New Zealand earlier in the year, the benchmark LVR for taking out a loan to buy a property was 80% for a first home and around 70% for an investment property.
This has meant that the initial ‘buy in’ or deposit required to buy a house has the potential to be lessened significantly, making taking out a mortgage more accessible than ever to the average New Zealand juggling savings, Kiwisaver funds and other sources of income to meet deposit requirements.
However with that said, banks have still typically been quite strict in who they will lend to. While the low interest rates offered to you might make your mortgage repayments seem significantly more affordable, there has been a huge disparity between what is offered and what banks test income against.
For example, while an interest rate might be offered at 3.5%, your income level would be tested against your ability to pay up to 7%, making taking out a home loan more difficult than what meets the eye. It’s this disparity between interest rates and servicing testing rates that the mortgage adviser industry have been pushing to close.
State of Play: The Servicing Trends we are Seeing Now
Since March this year, we’ve slowly but surely seen some really positive trends occurring. As the dust is settling a little and we’re learning as a society what to expect from COVID-19, it’s impact on financial and property markets and the different ways to mitigate risks in such a volatile economy, we’re seeing a bit of market confidence – even during resurgence of the virus.
Banks seem to be looking at the bigger picture and hoping to stimulate the New Zealand economy my making it easier to take out credit – which in turn is having some really positive effects for Kiwis looking to buy.
Our prayers have been answered and the gap between interest rates and service level testing is beginning to close, with banks dropping servicing tests to as low as the 5% mark (most sit around 6-6.5%), making it even easier for Kiwis to access the credit they need.
The Catch: Stricter Approaches to Certain Sectors and Self-Employed Income
While for the average Kiwi credit might be easier to attain, banks are still proving cautious when it comes to certain COVID-affected sectors such as hospitality and tourism. Many banks are doing multiple checks on income security for applicants who sit within these sectors and some are blanking it all together.
Prior to COVID-19, banks were happy to look at the previous years’ financial statements to gauge an applicant’s financial situation. Now, they’re looking into interim statements. Similar checks are also underway for self-employed Kiwis.
If you’re in one of these sectors or self-employed don’t worry – there are still banks out there willing to lend, it’s all about know the right places to apply. It’s here that a mortgage adviser will be able to help the most, pairing you with the right bank to give you the best possible chances of securing a loan.
The Conclusion? A Positive Direction for Home Buyers
Despite the increase in hoops to jump for certain sectors, overall we can confidently say that the more lending that occurs, the more it’s being tested at a lower level and the easier it is to attain a home loan.
It’s also important to note that the market is moving incredibly quickly. We’re seeing some clients apply for loans on a Friday and be approved for the same loan on a Monday morning. While turn around is still an issue (when you apply, you will have to wait a little longer than usual to hear back) this actually shows that the market is moving and people are finding the confidence to buy again.
If you’d like help with applying for a home loan and sound advice on the process, we’re more than happy to answer any questions! Simply get in touch with our friendly team, below.