Low-deposit finance across New Zealand becoming harder to get

Low-deposit finance is becoming increasingly hard to secure in New Zealand as banks continue to tighten lending standards.

CoreLogic NZ, Chief Property Economist, Kelvin Davidson said gross mortgage lending flows remained soft in August, with low-deposit lending falling to just 0.7 per cent for investors and 4.1 per cent for owner-occupiers

“A cautious attitude towards low equity loans isn’t hard to understand in an environment where property values are still falling,” Mr Davidson said.

“Looking at the breakdown by borrower type, it’s clear that both investors and owner-occupiers are struggling, with lending continuing to fall in recent months.”

According to Mr Davidson, low deposit mortgage volumes have been steadily decreasing this year.

“After exemptions (such as for new builds), just 0.7 per cent of investor loans were approved with less than a 40 per cent deposit in August – versus the speed limit of 5 per cent,” he said.

“And only 4.1 per cent of owner-occupier loans had less than 20 per cent deposit, against the speed limit of 10 per cent. 

“Given continued falls in property values, it’s not hard to understand a cautious attitude from the banks when it comes to approving loans to borrowers who already have lower equity levels. 

“With housing affordability still stretched and mortgage rates higher, it’s likely that fewer borrowers really want a high loan-to-value ratio (LVR) loan either.”

Mr Davidson said the recent lending data suggests investors have looked to interest only loans recently, to try and improve their borrowing capacity.

“There were hints in the data that a pick-up for interest-only (I-O) lending has helped some investors purchase property in the past few months, but generally speaking, I-O lending remains under control,” he said.

“Certainly, given the removal of interest deductibility for purchasers of existing property, there’s now more of an incentive for investors to repay some principal anyway.”

Mr Davidson said a key issue for the mortgage market in the coming months will be pressure as many borrowers roll off previous low interest rates onto a much higher repayment schedule. 

“To be fair, the scale of this ‘refinancing wave’ isn’t as big as it used to be – currently 44 per cent of existing mortgages (by value) are fixed and due to roll over in the next year, which is well down from the peak of 66 per cent in June last year, and back down to levels last seen in early 2018,” he said.

“However, anybody rolling onto new rates will still be seeing a large change in their repayments, given the sharp increases since the middle of last year. 

“And although it’s fairly safe to say we’re closer to the peak for mortgage rates than the trough, it’s still far from certain that mortgage rates have actually topped out yet – even despite strong competition amongst the banks.”

Mr Davidson said it was encouraging that most borrowers seemed to be coping well, helped by low unemployment. 

“The Reserve Bank data suggests that lenders haven’t felt the need to increase their provisions for bad debts too much, and just 0.2 per cent of loans are non-performing (where payments are 90 days late or have been classed as ‘impaired’),” he said.

“On the whole, then, it’s clear that mortgage lending activity remains pretty quiet. There hasn’t been anything to indicate that the RBNZ is considering a near-term loosening of the LVR rules either, and in the meantime, they’re actually still working on more lending restrictions in the form of potential caps on debt to income ratios – albeit not until mid-2023 at the earliest, if required. 

“Interestingly, high DTI lending is already tightening up anyway, due to some combination of banks’ own policies, reduced borrower demand, and also the simple effect of higher mortgage rates – which naturally reduce the amount of debt a borrower can service for any given income.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.