With the RBNZ announcing (last week, May 8th) that they’re lowering the Official Cash Rate to 1.5%, it’s a fact that borrowed money has never been cheaper in New Zealand. I can hear you rejoicing.

And why not? It means your existing mortgage should get a little bit cheaper, and when you’ve got a whopping great mortgage, every little bit of help counts.

It’s also a fact that mortgage money has become harder to get your hands on. The Lord giveth and the Lord taketh away. Let me explain…

I’ve written previously about the interest rate that banks test you against when you apply for a loan. You might recall that that test rate is 7 point something percent.  

The argument for using a much higher test rate, than what you’ll actually pay for the time-being, is that it’s prudent (I agree) – rates could be much higher in the future (hard to believe but it’s possible, I suppose). And since most loans have a payback period of 20 years or more, it’s good to know you can go the distance come what may (prudence, again).

Against that you’ve got a 5-year fixed interest rate at most banks of about 4.5%. The banks are testing your financial horsepower at a rate that is a full 3% higher than you’re paying now. The comparison really sucks when you use the one-year rate of 3.89%!

I don’t want to depress you but let’s put some numbers on it.

If I look at a loan of $500,000 and compare the annual interest cost of the current 5-year fixed rate, 4.5%, versus the test rate at say 7.5%, then it amounts to the bank saying ‘before we give you a loan, you need to prove you’ve got about $1,250 per month extra in reserve’. 

That’s a fairly high bar.

I’ve also spoken before about standard living expenses and how banks use a set of default figures to create a baseline which they can check a person’s actual costs against. No worries, I hear you say, that’s perfectly rational when trying to calculate a borrower’s capability.

Against that we’ve seen a number of lenders increase those standard living expense figures, in some cases by quite a bit. I totally understand why you’d do that where inflation is on the increase…

BUT, fact is, we’ve got bugger all inflation now (same story everywhere except Venezuela) and while living expenses have certainly increased in some categories (sheesh… insurance much?!), the fact that the RBNZ reduced the OCR yesterday tells you that living costs (ie. inflation) hasn’t increased that much overall. 

Which brings me to my point (finally!) – the weighted average retail price of broccoli! It’s also gone down over the last 12 months falling from $8.35/kg in March 2018 to $6.37/kg in March 2019. Pity the banks don’t base their living expenses on the realities of demand for the humble brassica – a stock standard vege that doesn’t have nearly the street cred or economic sway of avocadoWhy the banks have increased their living expense ratios in this context is beyond me.

Borrowers have a raft of other more qualitative hurdles to work through now as well. I’m not opposed to any of these things, but it does make the path to getting a mortgage tougher now than it has been in a long while. 

Some examples for you:

  • The LVR speed limits– relaxed from where they started but still there
  • Anti-money laundering legislation
  • Affordability for interest only loans being assessed on a Principal & Interest basis rather than using actual interest payments
  • Guarantors need to prove they can service the debt too, it’s not just about their equity
  • A general tightening on documentary evidence (paperwork…) to back up your numbers

This is not a whinge. In this office, we simply deal with ‘what is’ and position clients in relation to it (we haven’t got that much swagger!). But the divergence seems out of sync, at least from where I’m sitting.

Borrowed money is about as cheap as a kg of broccoli, but arguably harder to get your hands on. 

What’s going to change? Well, we hope the banks can align things a little more closely in the near future. But who knows?! 

What we can do though, is make your application as sharp as possible. That’s what we do – screen and vet your paperwork and approach, so you make the best impression with the bank. Get in touch and let’s see if we can make your numbers work. 

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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