Buyer Beware author Maria Slade gives us her top tips from the experts on being mortgage-ready in the NZ market.
1. Curb conspicuous consumption
If you take $100 out three times in one night at the casino it won’t go unnoticed, particularly if it happens regularly. The banks will examine your statements, and they take good account conduct seriously, so consider how your spending habits look.
2. The value in valuations
If you take out a mortgage of over 80 per cent in a city such as Auckland or Hamilton, where prices are rising rapidly, put it on a fixed-interest rate for a short term and then get your property revalued. For example, one new homeowner took a higher interest rate for six months, and by the time the term ended prices had increased enough that the mortgage had fallen to under 80 percent of the home’s value. It meant the owner could get a more favourable interest rate. So consider short-term pain for long-term gain.
3. Testing times
Interest rates may be at a 60-year low, but lenders do not use these rates when assessing your ability to pay the mortgage. They need to build in a buffer to make sure you can still meet your commitments should interest rates rise — which inevitably they will. That buffer is called a ‘test rate’, and can be anything up to 2 percent higher than the current rates. For example, Westpac builds in test rates of 1–2 percent, depending on circumstances. It is worth bearing this in mind when doing your own back-of-the-envelope calculations on how large a mortgage you can take on, and how you would cope if the situation changed.
4. Not all non-bank lenders are loan sharks
The finance company collapses of the previous decade cast a long shadow over the non-bank sector, and there is still a view that it is all payday lenders and extortionate interest rates. Non-bank lenders do price for risk and are therefore more expensive, but they provide a credible alternative when the main banks say no. Being declined by a bank can be for something as simple as forgetting to pay your credit-card bill before heading off on your OE. Even if you later sort it out, you will be blacklisted for five years. A non-bank lender, on the other hand, would happily have you. You will pay a slightly higher interest rate until the five years is up, but by then you will have re-established your credit history, enabling you to move to a main bank and get a better mortgage rate. So, consider it a waiting room.
5. A warmer Welcome Home
Although the government-backed Welcome Home Loans are supposedly exempt from the LVR restrictions, mortgage brokers have reported difficulty in getting lenders to accept them. However, the smaller banks such as The Co-operative Bank, SBS Bank and Heartland Bank are often more willing to take them on.
6. Let’s pretend
Every adviser will tell you that one of the best things you can do when preparing for the commitment of a mortgage is to pretend you are already paying it. Work out what it will cost you over and above your current accommodation costs each week, and put that aside. If the weekly home loan repayment is going to be $500 yet your rent is $250 and you have got nothing left come payday, the bank will question your ability to service that loan. While you may still get approval because the bank can see there is a lot of discretionary spending you can cut back on, it is a lot cleaner if you have sorted that out yourself and are already putting the money away.