RBNZ's income cap won't affect most mortgage applications
May 12, 2016 at 4:10 PM
Moves by the Reserve Bank to introduce income-related lending restrictions are out of touch, and will have no impact on the heated property market because income caps are no longer practised in New Zealand.
The banks and other lenders are clearly already taking appropriate measures to establish affordability, and no longer base decisions on whether to lend or not on a percentage of a person's income – it's an antiquated practise, and was well and truly put to bed by the Responsible Lending Code introduced last year.
The new models of assessment that the banks use include:
1. A mortgage applicant's spending habits and his or her capacity to repay. This is done by taking a close look at what they are already proven they can afford, such as their weekly rent, previous loan repayments etc.;
2. How much money the mortgage applicant has left at the end of the month; and
3. Their ability to repay at higher future interest rates than are currently being offered.
The current bank assessment model asks the question whether the applicant can afford to repay at much higher interest rate than that currently being offered. So the banks are already building in a 'safety' buffer. The banks have been running scared as a result of the Responsible Lending Code, so they've already taken all necessary steps to ensure any lending is responsible.
I would suggest that the ways banks are currently assessing affordability are strict and robust, and sometimes already fall below the income cap percentage being suggested by the Reserve Bank -- the banks are tougher than that. They don't take risks, period.
The reason banks want both pay slip and bank statements is to cross-check information provided by the applicant, and to get an overall picture. Income is a tiny part of it.
The income cap will most likely be a damp squib, but where it might have some impact is on a very small percentage of first time homebuyers.
I find it alarming that the Reserve Bank is yet again going after the average Kiwi, while the Government remains in denial about foreign ownership.
If parents are assisting as 'co-owners', will their income be included under the new suggested format? Would boarder income and flatmate income be considered as part of the household income as it is now?
Assessing someone's affordability as a percentage of income is irrelevant. It is what is left over at the end of the month which is the key.