Just how hard is buying your first home now? Approved by the bank, only to be turned down by Kāinga Ora!

New Zealand's largest commercial bank, ANZ, has again paused mortgage lending to borrowers with deposits below 20%. Confirming the pause, an ANZ spokesperson said the Reserve Bank of New Zealand limits commercial banks' lending to borrowers with deposits below 20% to 10% of lending. To comply with these strict limits, ANZ is pausing new home loan applications with loan-to-value ratios (LVRs) above 80%. The news is a major blow to many investors and home buyers. For first-home buyers in particular, government assistance seems to be the only way left to realise the dream of home ownership.

 

New Zealand housing agency Kāinga Ora recently said it approved 1149 first-home buyer grant applications in the first quarter of this year, down 60% from the 2966 applications approved in the first three months of 2021. Under the scheme, each person can apply for a grant of up to NZ$5000 towards an existing home or up to NZ$10000 towards a new build, provided they have contributed to KiwiSaver for at least three years and their income falls within the specified income caps.

 

Last month, the Government also raised the house price caps for the First Home Grant to reflect changes in housing market prices. First-home buyers can now qualify for the grant when purchasing a new or existing property in Auckland for less than NZ$875,000. Announcing the change, Housing Minister Megan Woods said funding in the Government's Budget would pay for around 7000 additional First Home Grants each year.

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A regional comparison of First Home Grant house price caps before and after the changes

 

“The latest eligibility requirements for the First Home Grant:

1. Be aged 18 or over, with pre-tax income over the past 12 months below the specified income cap;
2. An individual buyer with no children: annual income over the past 12 months must be no more than $95,000; an individual buyer with at least 1 child: annual income over the past 12 months must be no more than $150,000; two or more buyers, usually a couple: combined annual income over the past 12 months must be no more than $150,000.
3. Currently own no property, except an interest in Māori land;
4. Have contributed at least the required minimum amount to KiwiSaver, a complying fund or an exempt employer scheme for at least three years;
5. Buy a property within the house price cap for its region and live in it for at least 6 months;
6. Have a deposit of at least 5%. The 5% deposit may include money withdrawn from your own KiwiSaver account, Home Start Grant funds, bank savings or cash gifts from family, but cannot include loans or guarantees from family members, among other requirements.

 

Actual applications fall well short of expectations

 

The reality, however, clearly falls short of the Government's expectations. Approvals have declined steadily since July 2021, falling by around 1000 applications every three months. In the 12 months to the end of March 2022, the Government approved 9474 grants, less than half the annual target of 20000 set by the National-led Government when it announced the scheme, then called the HomeStart Grant, in 2014. A spokesperson for the Ministry of Housing and Urban Development attributed the low application rate to house price caps failing to keep pace with house price changes over the past 12 months.

 

Recent media reports also revealed that between January 2021 and March 2022, Kāinga Ora rejected 20 of the 2696 First Home Loan applications submitted by lenders because they did not meet its eligibility criteria. First Home Loans aim to help people who do not have enough savings for a deposit but can afford repayments to buy a home. Approved applicants can buy with a deposit of just 5%. Participating lenders refer applications from first-home buyers they consider to meet Kāinga Ora's credit criteria to the agency for sign-off. Kāinga Ora underwrites the loans, enabling borrowers to obtain lending that would otherwise fall outside lenders' criteria, which normally require a 20% deposit.

 

Reasons applications are declined

 

Jason Lovell, home ownership products manager at Kāinga Ora – Homes and Communities, said that although most applications were approved, a small number were declined because they failed to meet some of the criteria:

 

 

Kāinga Ora declined First Home Loan applications when a registered valuation identified maintenance issues costing more than NZ$10,000 to fix. Applicants may also miss out if they want to retain more savings rather than put as much as possible towards their deposit. Lovell said how much was “too much” was assessed case by case, but most savings should go towards the home purchase, leaving a reasonable amount to cover expenses such as moving, conveyancing fees or furniture. Applicants whose applications are declined can reapply once they meet the eligibility criteria.

 

 

EasyStreet mortgage adviser Gareth Veale said declining applications would prevent first-home buyers from purchasing homes. With the Reserve Bank's restrictions on bank lending, Kāinga Ora's scheme was some people's only chance to buy. In practice, many banks, particularly ANZ, would approve low-deposit loans only for high-income earners, leaving ordinary first-home buyers out. Veale wanted Kāinga Ora to exercise more discretion in some areas, such as approving applicants with a good employment history who had not been in their current role for the required period. One of his clients was declined after switching from engineering to care work because they had not worked in the new role for more than 12 months, as required by Kāinga Ora's eligibility criteria. Veale said this went beyond what ordinary commercial banks required, as banks were usually satisfied with PAYE income from a permanent contract and a good previous employment history.

 

Another client missed out on a First Home Loan because he had inherited a classic car with significant sentimental value. Kāinga Ora would not accept that he could keep it and required him to sell it and put the proceeds towards his deposit. The overly strict criteria meant only a small number could qualify, while many strong applicants were unable to obtain the loan.

 

 

In May, the Government removed house price caps from the First Home Loan scheme, giving eligible applicants a wider choice of properties, but there were differing views in the market. First Home Buyers Club director Lesley Harris said that although house price caps had been removed, income caps for First Home Loan borrowers remained, and buying in Auckland or Wellington often required an income above those limits. A NZ$600,000 loan required a combined income of at least NZ$150,000, well above the income cap.

 

Mortgage broker Stuart Wills, who runs the Kiwi First Home Buyers Facebook group, said people declined for a First Home Loan often did not know whether the bank or Kāinga Ora had rejected their application, as letters usually came through the mortgage lender. He also found that applications were often declined over what he called “grey areas”. For example, people who had not been in their job for 12 months, or whose income fell outside the cap, struggled to obtain bank loans. In principle, income was calculated over the preceding 12 months, so changes in income could also change a person's eligibility for a First Home Loan. Putting their savings towards the deposit might also enable them to meet the lending criteria. Wills said his firm had only recently begun applying for First Home Loans for clients because the previous house price caps had made this unworkable in Auckland. Not all banks offered First Home Loans, so people should shop around. Participating lenders included Westpac, Kiwibank, SBS Bank, The Co-operative Bank and Unity.