First-home buyers, take note! Alongside favourable market conditions, do not miss the chance to access government home-buying assistance

Some real estate agents say the first-home buyer market is recovering rapidly! Although the path to home ownership remains bumpy, banks' relaxation of lending rules under the CCCFA (Credit Contracts and Consumer Finance Act) will bring more first-home buyers into the market in a few months. A series of positive developments for first-home buyers announced in this year's Budget, including the nationwide removal of First Home Loan price caps and higher First Home Grant price caps, will provide further stimulus for a property market recovery.

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However, high inflation is not the only difficulty facing first-home buyers. Banks are also assessing borrowers' ability to repay their mortgages at higher interest rates, commonly known as stress test rates. Just yesterday, ASB announced that it was raising its stress test rate from 7.85% to 8.15%, effective immediately. (Keep following YIJU New Zealand's ongoing coverage of recent changes in the lending market.)

 

The pressure of rising interest rates and first-home buyers' changing attitudes

 

Mortgage Lab chief executive Rupert Gough said interest rates were the primary issue facing first-home buyers, because higher rates would seriously affect their willingness to buy. For example, someone who could afford a NZ$1,000,000 mortgage when rates were low last year would now, a year later, be able to afford only NZ$850,000. Over the past few months, the market has shifted from FOMO (fear of missing out) to FOOP (fear of overpaying). Economist Benje Patterson urged first-home buyers to test their mortgage repayment capacity at very high interest rates. Whatever short-term stress test rate a bank uses, buyers should consider how they would cope with higher rates. If rates rose to 12% or even 15%, could they still get through? High inflation currently dominates the headlines, but the public hears little about the harsh reality facing borrowers who have to accept rates several times higher when they refix their mortgages.

Economist Benje Patterson 

Image sourced online, as are those below

 

South Auckland mortgage broker Solomon Kurukuntala said he had noticed a subtle shift in the mindset of first-home buyers in his area. He felt they were more level-headed as they returned to the market and more accepting of higher interest rates. Buyers who were shocked by soaring rates at the start of the year had realised they could no longer spend as they once did, and that they did not need to stretch their house-buying budget to the maximum approved loan amount...

 

'A year or two ago, borrowers pre-approved for NZ$1,000,000 would typically look at properties worth NZ$1,200,000. Now, the trend is that borrowers pre-approved for NZ$1,000,000 are more likely to look for a NZ$900,000 home. Borrowers are well aware of the extra burden created by rising interest rates and other costs.'

 

Kurukuntala has also found that developers have become more realistic, which greatly helps them sell properties at reasonable prices rather than seeking the high prices seen in last year's market.

ASB chief economist Nick Tuffley

 

ASB chief economist Nick Tuffley said he saw two major positives for first-home buyers at present: house prices could continue falling until early next year, and buyers' FOMO had disappeared. From yesterday's YIJU New Zealand article we learnt that falling house prices bring first-home buyers a step closer to their dream of home ownership, provided they can secure a bank loan. As long as they can afford the mortgage repayments, lower house prices mean more choice and a better chance of buying a home they like in their preferred area. In theory, qualifying for a mortgage depends on two things: your income and your savings. In other words, the bank or mortgage lender needs to assess whether you have enough income to cover your future mortgage repayments and enough savings to meet loan-to-value ratio (LVR) requirements.

 

How to address the deposit challenge

 

First, you cannot buy a home without a deposit covering a certain proportion of its price. For most people, the minimum deposit is 10%. A 20% deposit, of course, makes it easier for first-home buyers to obtain a mortgage because it represents a lower-risk home loan for the bank. So does having a deposit of only 10% or less mean a first-home buyer cannot buy? The answer is no. Jiayuan Finance mortgage advisers recommend that first-home buyers familiarise themselves with the current eligibility criteria for the government's First Home Loan assistance scheme through Kāinga Ora before applying for a loan. With government assistance, first-home buyers may be able to realise their home ownership dream with a deposit of just 5%.

 

 

Keeping everyday spending under control is key

 

Jiayuan Finance's professional mortgage advisers say another key issue when applying for a loan is 'controlling household spending'. Before helping clients submit a bank application, they usually review the applicant's earnings and household income and expenditure, then work through questions such as how much to borrow and how large a deposit is needed. Jiayuan Finance mortgage advisers ask applicants for bank statements showing transactions over the past three months. This is a very important step because banks assess household spending when processing applications to understand where disposable income goes and whether the applicant will be able to afford repayments after obtaining a mortgage. Inexperienced first-home buyers should keep a close eye on their income and expenditure at every stage of the buying process. In particular, starting to control spending several months before applying for a mortgage will help them save a deposit faster and maximise the amount they can borrow from a bank. Other useful tips include temporarily cancelling a credit card with a NZ$10,000 limit, which can immediately increase borrowing capacity by NZ$40,000; cutting weekly household spending on food and groceries by NZ$50, which can immediately increase borrowing capacity by NZ$30,000; and eliminating debt wherever possible, including cancelling unused credit cards, clearing instalment payment balances and avoiding spending arrangements such as Afterpay that could affect mortgage affordability.

 

From Kāinga Ora receive additional home-buying assistance

 

Once borrowers have their income and spending under control, it is time to assess whether they qualify for additional home-buying assistance from Kāinga Ora. According to Kāinga Ora's official website, a sole parent whose income over the past 12 months does not exceed NZ$150,000 is eligible for the first-home assistance scheme. This means they need a deposit of only 5% to buy their preferred property. Thanks to government home-buying assistance, isn't the dream of buying a first home easier to achieve for these fortunate recipients than for buyers still struggling to save a 10% or even 20% deposit?

 

 

Problems you may encounter when applying for a mortgage

 

When submitting a mortgage application, borrowers need to communicate thoroughly with an experienced mortgage adviser and apply for the loan amount best suited to their financial circumstances. Jiayuan Finance mortgage advisers, who have many years of market experience, say applicants should not be too worried even if their application is declined. They usually help clients establish the real reason for a rejection, which may be that a particular lending requirement has not been met. Understanding why an application was declined helps applicants resolve the issue and apply again. A rejection by one bank also does not mean every other bank will reject the application. Different banks have different assessment criteria, and an experienced mortgage adviser can help identify the bank whose lending policies best suit the applicant's financial circumstances. Even if all commercial banks say no, borrowers can still apply through a mortgage adviser to second-tier lenders with more flexible policies, at interest rates only around 0.5% higher than those of mainstream banks.