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Mortgage Advice Blog

Get the latest news and tips about mortgage finance and the property market. Scott Miller, mortgage broker from Advanced Mortgage Solutions comments on housing and lending.

November's Property Gazette

Published by Scott Miller on Thursday, November 13, 2014 in

What you need to know about low deposit loans

With Wednesday’s announcement that Reserve Bank restrictions in regard to loans for those with less than a 20% deposit staying for now, with no changes to policy surrounding this, no doubt there are many thinking home ownership will always be out of reach.

Don’t be totally despondent though as there are options and solutions that may work for you. Banks review their appetite for low deposit lending regularly, particularly around surplus income required to meet their criteria for borrowers in this space. Where you could be declined one month, the next could see an approval based on the banks percentage of loans written and whether that figure is over or under the allowed percentages stipulated by the Reserve Bank.

The competition for borrowers with a 20% deposit is still fierce, and although this may seem unfair to those of you struggling to even get on the property ladder, it actually enhances your chance of financing a home with less than a 20% deposit, as every loan written in the “greater than 20 % deposit” space releases 10% of that loan amount to the pool for low “less than 20% deposit” lenders.

Take it that Mr Smith with a 20% deposit is settling a  $500,000.00 loan this week, that means the low deposit pool now has $50,000.00 available to lend to those who meet the criteria. Some weeks we have seen banks with no funds to lend in this space, so this means that even though there is demand, there is no supply and therefore a decline may not need to be seen so personally as a reflection of your characteristics. It may simply be that there are no funds available and trying again may be the thing to do.

Although this news may not make life less complicated for low deposit borrowers, we need to re-iterate that a large percentage of the clients we are helping are still First Home Buyers, Banks are lending above 80%,  and there are options and solutions around moving forward. In the hope of restoring confidence we have below listed some top tips for sourcing finance and preparing for borrowing in this space.

    • See a Registered Financial Advisor (us) as we have up to date market information, specialise in Home Loans, save you time sitting with all of the lenders and money given discounts we can get, and give direction
    • Operate your accounts well. Keep them within their limits, and avoid dishonours and unarranged overdraft fees
    • Save regularly into an account you don’t touch. If you are saving for separate purposes, have different accounts for each purpose
    • Minimise short term debt. Ask us for advice around whether to repay and reduce your outgoings or leave it in place and therefore have more deposit. One size does not fit all
    • Show stability in your place of work and residence. Moving around a lot, although sometimes unavoidable in Christchurch currently doesn’t give the bank confidence in finding you if things go wrong
    • Sign up for Kiwisaver and enrol your kids. There are First Home options and benefits for being a member. Ask us how and what
    • Ask for advice from us  in regard to support from family. There are guarantee and surety loan options available to those who have family willing to assist

As always it’s better to know how you can get there if it it’s not right now, and as always we are here to help.

The property market has certainly picked up over spring, however there is a lot of comment around the LVR restrictions imposed by the Reserve Bank in October 2013, and its effectiveness in dampening the market.

The LVR restrictions imposed were designed to slow the market and reduce the exposure of first home buyers if the market was to fall.  In September 2013, 80% + LVR lending accounted for 25% of all lending, and this was expected to climb.  The restrictions meant that 80% + LVR lending could not exceed 10% of a lender’s total loans.  The result is that 80% + LVR lending is now running at 8.4% of total lending.

As a result of the restrictions, those most affected were first home buyers who had trouble raising sufficient deposit to enter the market.  This in turn opened the door to property investors as there was less competition for homes in the lower price ranges.  Property investors were able to increase their portfolios at the expense of first home buyers.

In the meantime property values have continued to rise bringing into question the Reserve Bank’s decision to impose LVR restrictions.  However there has until now been a cooling of the market in relation to new listings that may be due to restrictions in the LVR.

If the LVR restrictions were to continue, this would further exacerbate the plight of first home buyers who have been shut out of the market.  Young couples without sufficient deposits would be facing a lifetime of renting, which was not the original intention.  Alternatively both lenders and borrowers have become more creative in structuring loans around security offered by generous parents.

There is speculation that the lending restrictions will be relaxed and this is the subject of a select committee hearing to be heard on 11 November.

The general feeling in the market is that the LVR restrictions have not had the desired impact, and that market forces will create a more level playing field in future.  Markets adapt and we are seeing development on the fringe of our larger cities, like the new builds in Pokeno south of the Bombay Hill.  We may see a growing trend of the baby boomers cashing up and moving to the provinces.  This could ultimately stabilize prices as more properties come to market for this reason.

We are seeing the resurrection of some less desirable areas as people focus on value for money and quality of housing stock.  Ex state housing areas offer solid homes in handy areas.  In Pomare in the Hutt Valley complete blocks of state housing have been demolished to make way for new builds at competitive prices. 

Those returning from overseas or migrating to New Zealand will always create a demand for property in areas of high employment.

It is, as always, a question of supply and demand.  This over time will have a levelling effect, and is an effective way in self-regulating the market, rather than Reserve Bank intervention. 


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