What do the banks measure when weighing your mortgage application?
July 27, 2016 at 9:02 AM
New Zealanders continue to top up their mortgages at a steady clip, but more and more home owners are discovering that the equity in their homes is no longer enough for bank approval – even if you want to use the money to add value to your property.
In the current environment, banks are putting means, income and cashflow ahead of property equity as criteria for loan approval, even if you just want to renovate.
We are aware that many homeowners are choosing not to sell -- just in case they can't afford to step up to the next level because prices are moving so fast. Instead they are choosing to stay put and renovate.
However, often increasing an existing mortgage is not easy even when there is good equity.
It is important for homeowners to remember that while the Official Cash Rate (OCR) may be low at the moment, banks do not assess affordability against current interest rates.
It's all about affordability and how much cash you have left over at the end of the month. Banks will calculate the ability to repay debt at interest rates of, for example, between 4.85 per cent and 7.65 per cent – each bank has its own assessment interest rates.
The price rises in Auckland and regional areas have diminished the weight that equity used to carry. Added to this are factors like the Responsible Lending Code that banks must abide by. I would suggest that the banks are no longer what we would call equity lenders — it's affordability, income and lifestyle that count."
In short, people who are asset rich but cashflow poor are going to struggle to get finance.
It is definitely a new development, and I would go so far as to say that even mortgage brokers like myself will be reluctant to refer cashflow poor homeowners to non-bank lenders because we, too, have responsibilities to ensure that any lending is affordable for the borrower.
While there is a strong likelihood that the Reserve Bank will reduce the OCR further, this may or may not influence the variable rate that banks offer – however, longer term interest fixed rates are only going to go up.
I believe we are at rock bottom on long term fixed interest rates.
My advice to borrowers is that the better value on your home does not necessarily make you rich because it's all relative. Be sure you have the income to cover the repayments of your required debt at considerably more than the current bank rates, and do not be seduced by the OCR – it is not an absolute measure of what interest you will end up paying.