Debt is a bigger obstacle to first home ownership than housing supply

March 27, 2018 at 4:29 PM

Auckland, New Zealand: Mortgage Brokers (March 2018) – If you want to buy your own home, get rid of your debt. In fact, make it a priority over saving for a house deposit.

I’ve seen a sharp rise in inquiries from first home buyers in recent months. This seems to be a direct response to a cooling in the housing market and moves by Government to ban foreign buyers.

Supply is only a small part of the problem, however. The real problem you need to worry about is debt.

Mainstream banks are still tough on approvals even with a cooling housing market. This is because the Responsible Lending Code, loan to value ratios (LVRs), and the Credit Contracts and Consumer Finance Act require it of them.

I wasn’t surprised when outgoing Reserve Bank official Grant Spencer claimed LVR restrictions were here to stay and I was even less surprised by his call to add debt to income (DTI) to the Reserve bank’s toolkit. 

Your levels of debt, and types of debt – like credit cards and hire purchase payments – aren’t just a ratio or a box that needs to be ticked. Banks use them as windows into your lifestyle, your attitude to money and your financial discipline, or lack thereof. Your debt tells the bank how big a risk you are and if they should give you a loan (of course, there are always non-bank options available).

In order to get your mortgage, you need to manage your debt in such a way that banks will see you as a good investment. The aim of financial regulators is not to get people into a house; it is to prevent financial risk to both borrowers and lenders.

When it comes to buying your first home, it’s a question of affordability, not supply. The right of every Kiwi to own a home is secondary to their ability to service their debt responsibly, and unless the Government comes up with some very creative solutions, I don’t see anything changing.

In fact, I think debt is going to become more and more of an issue. Our levels of consumer debt have continued to rise since the GFC to the point where it is becoming a real obstacle to home ownership.

At the end of the day, you need to save up to pay off your debt before you save up for a house.

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Tags: Auckland mortgage broker, Takapuna mortgages


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