Lending clampdown: The options left for first-home buyers

Banks have virtually slammed the door shut on low deposit lending for existing property until the New Year but experts say there are still some options left for first-home buyers.

On Tuesday ANZ became the latest bank to announce a “pause” on lending to borrowers with a deposit of less than 20 per cent for existing properties.

That follows both BNZ and Kiwibank introducing restrictions in the last week.

Banks have been under pressure to reduce lending to low deposit borrowers since November 1 when the Reserve Bank dropped the cap, meaning banks can only lend up to 10 per cent of new loans to owner-occupiers with a deposit of less than 20 per cent.

Karen Tatterson, a mortgage broker with Loan Market, said there were still a couple of options for first-home buyers.

“One is, look at a new build, because new builds are exempt.”

The other options were to go back to their mum and dad to see if they could top them up to the 20 per cent deposit with a deed of acknowledgement of debt which said how much was owed to the parents and when it would be paid back.

“We factor the servicing of that debt into the loan application and we do it that way or we do it as a gift.”

Tatterson said the other choice was to “save like you have never saved before”.

“This generation has never had to wait for anything or had to go through the hardship of having to reassess their expenditure. It has been quite a surprise for them.”

Tatterson said the loan to value restrictions had come back into force and the banks had to bring their lending books into line again.

“From a lender’s point of view they are better to close the door, give themselves some time to bring everything back in line and then reopen it once they have got everything lined up again.

“But it is tough. It is going to make it really hard for first home buyers which they are the ones we are supposed to be helping.”

Tatterson said while new builds were an option it was also proving difficult with some contract prices being increased part way through a build due to the big increase in building costs.

One of her clients has had to find an extra $50k this week on top of the $700k they were already borrowing due to a developer increasing the build price.

If a customer couldn’t borrow the extra money developers were able to use a sunset clause that enabled them to cancel the contract and then onsell it for a higher value to someone else.

Tatterson said some buyers could also sit out the market for a while. “I think that is quite a good choice.”

Banks have already tightened up their lending processes ahead of changes coming into force on the Credit Contracts and Consumer Finance Act from December 1.

“There are a lot of people now rather than coming in and talking to them and getting them pre-approved we have to do an audit of their accounts and sit down and say if you want to buy a house you have to get your expenditure in line, look at your discretionary spending. Stop buying a $5 coffee every day.

“A lot of the people we are talking to now are not ready to buy straight away, they are three to six months away anyway.”

John Bolton, managing director of Squirrel Mortgages, said this lending clampdown happened last time the Reserve Bank reduced the cap on low deposit lending.

“It’s a temporary thing and all it is they have been so enthusiastically lending out to first home buyers that they have suddenly got caught out.

“They do these pre-approvals and they don’t know how many people are going to buy or when they are going to buy or what. They throw all these pre-approvals out and then the Reserve Bank changes the rules.”

He said banks could not control how fast pre-approvals turned into actual deals. “You slow down the pipe and you get this backlog. They are just nervous.”

If banks go above loan to value ratio caps set by the Reserve Bank they risk breaching their banking license. That has resulted in banks taking a conservative approach to ensure they go well under the caps.

Bolton said it was really frustrating especially for those buyers who had done the paperwork and been pre-approved only to find they could not use it.

“It is pretty gutting.”

But he said new builds were still exempt which allowed people to buy off the plan, a house under construction or one recently completed.

He urged those looking to buy an existing property to avoid auctions.

“You cannot buy unconditionally. If first home buyers were braving it going to auctions, there is no way they can now.”

Bolton said if people could get a contract to buy a property in place with a finance condition it was still possible to shop around and find a lender provided there was plenty of time before it went unconditional.

“Once borrowers have a live deal the banks are more flexible.”

But he said between now and January it was going to be tight. “Even if you have got something under contract we are going to struggle to get it through. But after January it will start to loosen up.”

One positive was that those who could afford to buy would see less competition in the market.

“f you can make it work it is a really good time because just about every other first-home buyer has been taken out of the market.”

Bolton said first-home buyers should use a broker. “You are crazy going to a bank direct because the reality of these speed limits is they are going to be changing all time. Last time it was on a weekly basis.”

One of the challenges this time around was that because property investors were not buying as much, first-home buyers were a much bigger percentage of total turnover.

“It slams the brakes on even harder. It is frustrating.”

Bolton suggested borrowers also try the non-bank lenders where interest rates are a little higher.

“There is a little bit of scope in that non-bank space.”

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