Property values rise over time
Mortgage broker Glen McLeod talks about whether buying with a low deposit is a bad idea in a falling market.
Q Would you be wary of borrowing with a 10% deposit, if house prices are going to fall?
A When it comes to lending money with less than 20% deposit the lenders always take extra precautions before granting an approval.
The lender wants to know the risk just as much as you do. They want to ensure the deal provides them adequate security cover in case of market falls. They want to be assured that you have the ability to pay the loan.
The last thing they want is a mortgagee sale of the property. Effectively, the application process for lending more than 80% has a more stringent set of criteria to protect them against loss.
To borrow using 10% deposit you will be looking at an owneroccupied property. In theory that means you are looking at staying in that property for a long time.
We have learnt over many years of statistics that property prices over a long period of time increase.
Throughout the past three or four decades, we have seen property value corrections at various times after the market has steamed ahead out of control.
What we’ve seen over the past couple of years – 30% increases in value – is not sustainable, and take the ability for people to affordably purchase in a market away from them. What we seem to be going through right now is a market correction. How much the market will fall no-one really knows.
We do know that once we start to come out of the slump, prices are more than likely to rise again, albeit at a slower rate.
The real question would be is it OK to borrow at 90% at the present time if the opportunity arises.
Once you’ve bought a property with a deposit and have your loan set up, provided you continue to pay the loan based on the contractual terms of your mortgage, the lender will continue with their contractual obligations. The only time issues seem to arise in this area is if you are unable to meet your obligations and stop paying your mortgage. At that time the lender will then reassess your total position.
So by continuing to pay your mortgage and ride through the tumultuous times should see you have a property that’s worth more than you purchased it for. As Rachel Hunter says in a shampoo advertisement, ‘‘it may not happen overnight, but it will happen’’.
People who bought before the global financial crisis saw their houses drop in value for two or three years but then almost double in value over the next five- to seven years.
Buying a house and taking on a mortgage causes anxiety for most people. That’s OK, it’s just the body and mind telling you that you need to get more answers before you go ahead and make your decision.
Talk to your experts. Discuss the situation with your adviser, lawyer, accountant and any property expert that you may know.
Knowledge is power in these situations. Because once you’ve made the decision what you really want to do is put the paperwork in the bottom drawer and enjoy the purchase and your new home.
Glen McLeod is director of Edge Mortgages. He answers readers’ questions about home loans, whether you’re a first-timer just getting into the market or already have a loan and wondering about the best way to manage it. If you have a query, email susan.edmunds@stuff.co.nz