New rules for borrowing money to buy a house - what does it mean?

Do you own your own home (well, in conjunction with the bank)?

Or are you waiting to get on the property ladder?  Or are your children or friends waiting to purchase their first home?  As New Zealanders, owning our own home has historically been considered almost as a 'right'.  But with soaring house prices in the main centres, the dream seems to be getting more and more out of the ordinary kiwi's reach.

For those of us who purchased our home some time again (we have owned our home since 1995) - as the value of our houses increase,  we can relax, knowing that we are making headway on our mortgage.

But it is getting more and more difficult to purchase your first home.  The announcement by the Reserve Bank of NZ on 20th August 2013 has made this even more difficult.

NOW, the banks have been told that as part of the registration criteria, they have to limit their lending on mortgages, so that Loan to Valuation Ratios (LVR) of more than 80% make up only 10% of their total lending - from 1st October 2013.

So what does this actually mean?

It means that instead of being able to consider your mortgage application based on your income, and the value of the home, the banks will now have to work out criteria to prioritise who and how they lend money.

Banks have been allowed to lend as much of the value of the house as they wanted - up to 100% if they want.  Usually they will add on some 'repayment insurance', which costs extra, but this has allowed people to purchase their own house without having to save a big deposit.  However, this has also allowed property investors to buy multiple properties without any deposit.

There are widespread concerns about the ability of people to purchase a home, as the price of houses is increasing rapidly in the major metropolitan centres (Auckland, Wellington, Christchurch in particular.)  There are many theories about why this is happening, but the general consensus is that there is lack of supply - particularly in Christchurch post earthquakes, and in Auckland - with a large number of migrants, first home buyers, combined with property investors.

Normally, what the Reserve Bank would do is to increase the Official Cash Rate (OCR), which would flow through to higher interest rates, which in theory would slow down the demand. But at the same time, this could increase the exchange rate, which would have other negative effects for the economy.

Another option that has been much discussed is to introduce a Capital Gains Tax, on all but the primary home.  New Zealand is one of the few countries that does not have a capital gains tax, and at this stage, this does not seem to be a politically acceptable solution.

In the absence of the ability to use those options, it appears that the Reserve Bank has taken the next step - limiting the lending ability of the banks.  Reserve Bank of NZ announcement.

It is interesting to note that the RBNZ is saying that the announcement is designed to protect our financial system against excess borrowing in the next downturn.  BUT this comes shortly after John Key announced changes to the KiwiSaver First Home Buyer rules, which are in line with these changes. See our blog article here..

KiwiSaver – More help for first home buyers – but only if you can get together a 10% deposit

How will this impact you?

If you are in the process of purchasing your first home, or changing your home, you need to be aware of the new rules.  Different banks have stated that they will have a different approach to dealing with these rules (remember, if they don't abide by the RBNZ rules, they may lose their registration status as a bank in NZ).  The banks have to decide who they will give their allocation of high LVR loans to (ie who they will let borrow more than 80% of the value of the house they are buying).

KiwiBank has said that it will make first home buyers a priority  for this allocation. ASB has said that it will favour existing customers.  The other banks are still developing their approaches.

If you are a first home buyer - here are some tips:

Make sure that you are in KiwiSaver and using it to its maximum to assist you into your first home.  This will make things much easier, as you can use your employee and employer contributions towards your deposit on your home.  You may also be eligible for the First Home Buyers subsidy.  Check our our blog articles on these topics:

KiwiSaver – More help for first home buyers – but only if you can get together a 10% deposit

First Home Buyer Subsidy – KiwiSaver

Student Allowances and First home buyer subsidy- the rules

First Home Buyer Withdrawal – KiwiSaver

Westpac announced a special package, to help first home buyers in advance of the announcement. However,the announcement from the RBNZ came with warnings that lenders are expected to abide by the 'intent' of the policy.  Hopefully this Westpac produce will still fall within the 'intent'.

'Mum and Dad' third-party equity will make up deposit on home

Most importantly, you need to SAVE the deposit before purchasing your home.

If you want more information on KiwiSaver and how it can work for you, email us at kiwisaver@moneyworks.co.nz.

If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.


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