First-time buyers: Overcoming banking barriers to homeownership

First-time buyers: Overcoming banking barriers to homeownership

Lifetime’s Financial Adviser Mark Thomas asks what’s stopping first-time home buyers in New Zealand’s capital region from getting on the property market. As published in National Business Review. 

Recent data on the Wellington region from global valuation and property analysts CoreLogic revealed that the market slowdown has now firmly hit Wellington, with growth the lowest it’s been since October 2015.  

With interest rates remaining minimal and capital growth at the lowest we’ve seen in two years, for those wanting to purchase their first home this could be the perfect time to buy.

The Reserve Bank (RBNZ) rule introduced in October 2016 meant buyers now require a 20 percent deposit for trading bank mortgage lending for owner-occupied properties. Meanwhile, for investors the amount required is at least double. 

This RBNZ decision somewhat derailed (and mislead) a lot of would-be home buyers.

All of New Zealand’s major banks are governed by the same RBNZ lending rules, but the way in which they interpret those rules and their individual lending criteria can have its own intricacies.

The fact is that buyers are still getting mortgages with less than 20 percent deposit, with more options than many realise to buy with a 10 or even a five percent deposit.

Financial advisers will often tell people not to wait, if you have savings, there’s something we can do. The Government’s Welcome Home Loan is one of these and is a possible option for those with a 10 percent deposit.  In this case, if a first-home buyer qualifies, Housing New Zealand underwrites the bank’s loan to the borrower.

The reason why advisers urge buyers to disregard the 20 percent ‘rule’ is that whatever bank you approach they are likely to view each situation differently. Applying for a mortgage goes beyond savings, debt and property; and many banks are in fact interested in someone’s personal financial ‘story’.  This can be the difference between approval rather than rejection when it comes to a home loan.

The best banks are the ones that can see past the check-list lending criteria and understand people might have more complex financial situations, high ongoing customer potential, and that ultimately people’s lives can’t be neatly fitted into boxes.

Part of this is demonstrating how lack of current savings shouldn’t stop people from getting onto the property market ladder or put banks off from lending. Many first-time buyers think just because they have incurred some debt that they aren’t eligible to buy a home. In many cases, this is not true.

Depending on the size and circumstances of your debt, it might not pose an issue as long as it can be serviced along with a mortgage. 

Advisers can often help restructure the debt and make it a part of mortgage payments. This way it becomes subject to mortgage interest rates, which are often lower than personal loan fees.

Banks spend hundreds and thousands of dollars every year on advertising their difference to customers and potential clients so first-time buyers shouldn’t give up their dream of owning a home just because one says no.      

It can sometimes come down to the experience of the bank lending staff to understand an applicant’s unique situation and look at other options for raising the required deposit. Some banks allow buyers to have cash gift deposits from anyone, for others, it’s just immediate family; some banks won’t lend for certain types of properties or in particular suburbs, when others will.

In Wellington, where properties are coming onto the market and currently being sold within weeks, knowing how and where to get a mortgage pre-approved is vital to securing a sale in time. And for sellers, buyers with pre-approval often go to the top of the seller’s pile because, unlike those who need to get finance approved, pre-approved buyers only need to confirm the bank will accept the property.

If none of the top-tier banks are willing to grant the home loan, there are options with what are known as ‘second-tier’ lenders like building societies, which are not governed by RBNZ’s rules. Non-bank lenders do not currently need to adhere to RBNZ loan-to-value ratio (LVR) restrictions, although are mindful of them and do operate under all other regulatory requirements, especially the responsible lending code. Lots of couples, for example, choose to opt for a home loan through a second-tier lender, which is subject to slightly higher interest rates.  Once their property has made capital gains, they can transfer it to a trading bank where the LVR is 80:20 or better.

First-time buyers in every New Zealand centre should be using the free advice that is available to help them get ahead and interpret the ever-changing financial landscape.

Many resources are available online and financial advisers can also point first-time buyers in the right direction, putting together an application that shows their best financial qualities and explain the individual situation in a way in which the bank understands.

Just like a recruitment agent puts a strong candidate’s best foot forward for a job, it’s a financial adviser’s role to bring the human element into lending so the bank looks beyond the check list and understands why a potential customer is a good candidate for a home loan. 

Mark Thomas is a Wellington-based financial adviser for Lifetime. He began his 15-year career in the finance industry as a bank officer before becoming an adviser on home loans and risk insurance.

ARTICLE BY Mark Thomas - GET IN TOUCH