In an era of high inflation, high interest rates and high house prices, how should first-home buyers apply for a mortgage?

Most people believe they are unlikely to get a home loan and that trying is not worthwhile. In an era of high inflation, high interest rates and years of high house prices, it is difficult to attribute housing unaffordability to a single issue. Yet phrases such as 'loan applications are too difficult' and 'high rejection rates' seem to cast the Credit Contracts and Consumer Finance Act (CCCFA) as the culprit. Amendments to the CCCFA took effect on 1 December 2021, with banks having begun implementing them around October 2021. The legislation requires lenders to examine an applicant's spending over the previous three months and use it to assess mortgage affordability.

For anyone wanting to buy a home, the first question is naturally: 'What is the most I can borrow in my current financial situation?' However, an application can only be declined once it has been submitted to a bank for assessment. Applicants can therefore speak with a bank or mortgage broker and obtain a simple estimate. Once you know how much you can borrow, further questions follow: 'Will that be enough to buy a home I'm happy with?' If it is not, 'What could I change to borrow more?' To answer these questions, buyers need to clarify their expectations for future property prices and their ability to cope with interest rates. This will determine whether buying now is suitable. The process of securing the mortgage you want may also be extremely difficult. It could mean cutting luxury purchases from your daily life, or even changing jobs or moving to another city.

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According to CoreLogic's property market and economic update, residential sales activity began showing signs of slowing midway through last year and became 'truly weak' as that trend continued into this year. CoreLogic Chief Property Economist Kelvin Davidson believed many households would be forced to adjust their finances this year following a doubling of mortgage interest rates and the imposition of high debt-to-income (DTI) ratios. Davidson said: 'Getting a new mortgage this year will be harder than ever, and there is also a large wave of refixing ahead. Around 50% of existing loans are fixed but will face higher rates this year.' These borrowers will generally face higher repayments when refinancing. 'Higher mortgage rates and reduced credit availability have already had a significant impact on sales. It is worth noting that The housing market has recently entered a gradual downturn, with prices easing slightly. It is time for buyers, particularly first-home buyers, to adopt a new approach to mortgage applications.

How rising and falling house prices affect buyers' borrowing

For some prospective buyers, obtaining a registered valuation is a necessary step in purchasing a property. Banks generally require buyers with deposits below 20% to provide a valuation report from an approved firm. A registered valuer visits the property, assesses its strengths and weaknesses, and arrives at a reasonably objective and accurate value. This report is more accurate than the electronic valuations used for some homes, which simply estimate value using sales data for similar properties in the area.

In a buoyant property market, a registered valuation may carry more weight. Recent sales data may reflect prices paid several months earlier, meaning the assessed value is below the property's actual value. If the market has risen 5% over the past few months, for example, an electronic valuation could be off by 5%.

For mortgage applicants, this means a major change in strategy. Over the past few years, if an electronic valuation based on recent sales data put a property at NZ$1,000,000, a registered valuation would have matched or exceeded that figure because the market was rising rapidly. During a downturn, however, you should assess your assets using a slightly lower value—say, 5% less. In the example above, an electronic valuation might show NZ$1,000,000, while the registered valuation comes in at NZ$950,000. You would then need to make corresponding adjustments when presenting your position to the bank.

For property investors, a NZ$50,000 reduction in asset value means losing between NZ$125,000 and NZ$250,000 in purchasing power, depending on whether they are buying an existing home requiring a 40% deposit or a new investment property requiring only 20%. Clearly, in some cities, NZ$250,000 can put buyers in an entirely different price bracket, giving them more options.

Mortgage Lab property expert Rupert Gough believes first-home buyers considering a purchase in the near future should not rush to commission a valuation before any significant change in market values. Banks generally accept only valuations obtained through their own independent systems, preventing customers from exerting too much influence on valuers preparing the reports. Valuations also remain valid for only a short period, usually 3 months. Buyers who are not ready to submit the report to a bank promptly may have to pay additional fees or commission an entirely new valuation.

In his experience, obtaining a valuation before the bank requests one can involve many pitfalls, with the disadvantages outweighing the benefits. The only option is to understand which stage of the property cycle we are in and adopt an appropriate strategy. If you may buy soon and need every dollar of your current assets as security, consider applying for bank pre-approval early, then see whether the bank requires a valuation report.