low deposit loansThe RBNZ looks set to proceed with a version of one of the macro-prudential tools signed off by the Finance Minister earlier this year — a restriction on loan to value ratios. Word on the street is that while the restriction won’t put a complete stop on borrowers with small deposits it will make it harder to get a loan if you’ve only got 10% or 5% to play with. You may have heard the term ‘speed limits’ being used to describe what is about to happen and basically it means banks will have to ration the money they’ve got. A speed limit of 12% has been suggested – that is, of all the housing loans banks give out only 12% of them will be available to those of us in the low deposit space. First home buyers — you are in the firing line of these changes. And I’d say half of you who planned to buy a house by the end of 2013 will have to rethink your strategy if the speed limit is applied. I suspect we’ll hear quite a bit of moaning and groaning about these changes but do try to ignore the claptrap and instead focus on what the changes might mean for you.

Only the best loan candidates will be able to get low deposit loans.

In any market where supply is limited only the best get to go home with the prize. The housing market in Auckland is a case in point. The best loan candidates will be those who have big combined incomes, secure occupations, low to no consumer debt, squeaky clean credit checks and excellent account conduct. Lending criteria could become quite rigid at high LVR and I expect the number of declined applications we handle will double. Banks will be able to ‘cherry pick’. In a positive twist, pricing may improve for all classes of borrower. In the high LVR space, there could be intense competition for those borrowers who are the cream of the crop. And because banks will need to beef up the level of low LVR lending they do in order to ensure their proportion of high LVR loans remain within the speed limit competition could intensify at that end of the game too. You could see some pretty good deals so it will still pay to shop around.

Home buyers that don’t make the grade will have to rethink their strategy

That means either saving a bit longer or saving a bit harder. For some who are about to break the 5% threshold that reality will be a bummer. The good news is that if these speed limits produce a slowdown in house price increases (as I’m sure the RBNZ is hoping) then you won’t be left in the dust. That remains to be seen though. A delay also means the amount of money your employer puts into your Kiwisaver scheme will make your first home withdrawal that much bigger. That’s not a bad thing either. For most it will mean putting more thought into making sure you present as the kind of borrower the bank wants to cherry pick. Paying off debt may be better than adding to your deposit. Taking a few months to tidy up your bank accounts could also pay dividends.

Or it might mean you need to consider other ways of coming up with a big enough deposit.

Using a second lender to bridge the gap between what the bank will give you and the savings you’ve got is one way around it. Those lenders have yet to emerge en masse but if the speed limit is imposed they’ll appear alright! Using a guarantor/third party could be just the ticket too. In this scenario you use a portion of the equity in someone else’s property (usually mum and dads) as some or all of the deposit on ‘your’ property. With the increase in house prices over the last few years more parents actually have the equity to help out now. And while first home buyers tend to be couples, there’s nothing to stop a few mates from pooling their resources to put up a big combined deposit and chunky combined income too.

Whatever your situation, get some impartial advice

I seem to be saying this more and more these days but never has it been so true. Imposing a speed limit is a significant change and because no one really knows how things are going to pan out, smart borrowers will get someone alongside them. First home buyers especially. The uncertainty around how the market will react is one reason I’ve been an opponent of LVR restrictions. Another is that LVR restrictions are a demand side solution whereas much of the heat in the property market is the result of a supply side problem. Overseas the results of LVR caps have been quite mixed and range from killing the market completely to having absolutely no effect at all. Having said all that if the RBNZ are determined to give it a crack then there isn’t much use complaining about it. Far better to understand what it might mean for you and act accordingly. As they say — keep calm and carry on. CH    
About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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