Income the ace in the property game
Want to buy a house? How much you earn may be more of a factor in a bank’s decision to lend to you than how much of a deposit you have.
Mortgage brokers say there has been a shift in lenders’ attitudes and they are now much more worried about a borrower’s ability to service the loan than they are about how much cash they have in the deal.
Mortgage broker Christine Lockie, of Loanplan, said they put means, income and cashflow first.
Provided you have 20 per cent deposit or equity to get over the loan-to-value restriction for owneroccupiers, any extra will not impress the banks much.
That is especially relevant for homeowners who have seen their houses shoot up in value over recent years. That on-paper wealth increase does not count for much if you try to extend your mortgage, Lockie said.
Low interest rates do not help the affordability equation a lot because banks generally apply a test at a significantly higher rate, to ensure that borrowers could still manage a loan if rates rose.
Banks now operate under the Responsible Lending Code, which requires that they can demonstrate they had reason to be confident a borrower could meet repayments without suffering hardship.
‘‘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,’’ Lockie said.
‘‘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.’’
Another broker, David Windler, of the Mortgage Supply Co, said banks had cared more about income than deposit since the global financial crisis (GFC).
‘‘That was the lesson they learned from the GFC, when the lending environment was a bit looser. Ever since then, income has been a critical component. The Responsible Lending Code has taken that to another level.’’
He said banks were also keen to appear prudent in the eyes of the Reserve Bank, which has been considering new measures to slow the housing market.
But Home Loan Group director Darren Pratley said things seemed to be changing again.
The latest loan-to-value restrictions had put the focus back on equity, he said.