Buying your first home just got harder
JAMES WEIR AND MICHELLE DUFF
First-home buyers are in the firing line as the Reserve Bank aims its first direct shot at the overvalued housing market.
They can expect to face higher interest rates if they want to borrow more than about 80 per cent of a home’s value, under new moves revealed yesterday. That could push up the interest rate on a floating mortgage from about 5.85 per cent to about 6 per cent.
One banking expert has called the moves a “slap in the face” for first-time buyers. Some property investors and small businesses may also find it harder to get a big loan from a bank.
The hot housing market, particularly in Auckland and Christchurch, has led the Reserve Bank to force the big four banks to permanently increase their buffers against high “loan to value ratio”, or LVR, lending – when homeowners borrow more than 80 per cent of a home’s value.
Essentially, the banks are being made to set aside more of their own money in case the housing market slumps.
Massey University head of banking studies David Tripe said the changes were a slap in the face for first-home buyers and could push up interest rates by 20 to 30 basis points, taking a first home further out of reach.
The risk with trying to limit high LVR lending was that people would then look for second or even third mortgages from “high-risk” lenders such as finance companies, at even higher loan rates, as borrowers did in the 1970s, he said.
ANZ chief economist Cameron Bagrie said the move by the Reserve Bank was actually “pretty light-handed”, but should be seen as a warning shot, putting banks and borrowers on notice that it could take further action to control lending.
Federation of Family Budgeting Services chief executive Raewyn Fox said first homes were increasingly unattainable, and raising interest rates and deposit levels would make it harder for people to get on the property ladder.
However, making it more difficult to get a low-equity loan was not necessarily a bad thing, she said. The advice service often saw people who had borrowed between 90 and 95 per cent on their homes getting into financial strife, with mortgagee sales increasing.
“If it’s too easy to get into a home without saving a big deposit, then it causes problems down the line; people haven’t established a plan of saving, so if something happens they’ve got no backup.”
Thousands of people in their 40s and 50s still had not managed to get into their own home, she said. “They’re saying we’re just going to rent, and we think that’s really going to hit them when they get to retirement age and they have to pay rent on a retirement income.
“It’s going to completely change society – it hasn’t hit us yet, but it will.”
Harcourts Wellington city managing director Marty Scott said the rest of the country should not be penalised for problems in Auckland and Christchurch.
“Maybe they should restrict their loaning practices to the markets that are causing the problem. We are not the drivers of it.”
Prices are up about 8 per cent nationally and 13.5 per cent in Auckland in the past year. But in Wellington and many regional areas they have risen by only about 2 per cent.
Homes in the low-to-medium-price bracket, where most first-home buyers were looking, were currently the most sought after.
A $450,000 to $500,000 three-bedroom bungalow in a Wellington suburb would typically attract about seven buyers.
‘IF IT WAS A 20 PER CENT DEPOSIT . . . WE WOULDN’T BE HERE’
It’s been a stressful road to the Kiwi dream, but Upper Hutt couple Ben and Michelle Martin have finally achieved it.
After two years of scrimping, saving and searching, the newlyweds have just signed the purchase agreement on their first home.
But it wasn’t easy, and Mr Martin says there is no way they would have been able to do it if they had to stump up a 20 per cent deposit.
“If it was a 20 per cent deposit, that’s over 60 grand . . . we wouldn’t be here, that’s for sure. We’d be renting forever.”
The self-employed panelbeater, 32, and Plunket nurse, 29, were married in November, and baby Hollie joined them two weeks ago.
At first, they thought they would be eligible for the first-home deposit subsidy from KiwiSaver, of between $3000 and $5000 each.
But the house-price cap for their area was $300,000, and anything around that price was a “dump”, Mr Martin said.
The pair decided to forfeit the subsidy, withdrawing $11,000 from their respective KiwiSaver funds.
In the end, they raised a deposit of $33,000 for the $350,000 house they wanted. The bank had agreed to give them a 90 per cent loan, and charged them a further $4500 in “safety insurance” when their deposit fell just short.
After months of attending open homes, they settled on their house.
While Mr Martin reckons they paid more than it was worth, they were happy to get the property.
They have been there two months, and say the stress was worth it. “We’re absolutely loving it. It’s a really good feeling going home, I can tell ya.”
Average asking price of a house in Wellington: $436,000
Average annual household income in Wellington: $89,000
20 per cent deposit: $87,000
A couple, or single person, on an income of $89,000 would need to save $1640 a week for a year to fund the deposit.
Or they could save $303 a week for five years, without allowing for inflation.
Calculations from Sorted.co.nz. It advises that the first step in saving for a deposit is to set a goal. Cut down on non-essentials, and work out a household budget.
The bigger your deposit, the less interest you’ll pay.
– © Fairfax NZ News