Buying a house seems so complicated!
Are you confused about what you need to do to get finance for buying a new home, whether it be a build or your first home or an upgrade? Well that’s no surprise, as the banks seem to be confused too.
We have had super low interest rates for such a long time. For the last few years the banks have been in a rush to give out money to anyone that wants it with little regard for when the property and financial markets return to realistic sustainable rates. That changed in August. Since then, inflation has kicked in and interest rates have increased seven times! This doesn’t look to be slowing. The Reserve Bank indicated that they expected the OCR to be around 2% by Dec 2023, but indications are that this may happen sooner with the expectation that the OCR may hit 2% by December 2022.
The banks need to meet many rules when giving out money, along with their own policies. The policies of the banks reflect the Reserve Bank rules and other legislative requirements, including the CCCFA. The banks also need to make a profit to be able to provide dividends for their shareholders. The Reserve Bank is considering putting in further controls to limit the amount of debt that people can have based on their level of income. This will affect investors more than home owners, and is expected to affect less than 7% of the first home buyers.
The rules of the CCCFA are very black and white and all lenders are concerned about the audit of their lending. Loans that banks would have given people before the new rules came in (and that would improve a person’s financial situation and potentially take them out of hardship) may no longer be able to be made. The banks and the credit assessors find themselves saying no to loans that actually are affordable for people. The rules were put in place to help protect the vulnerable and it seems that the new rules have missed the mark by being so black and white. Common sense no longer applies, because when the banks are audited common sense will not meet the mark and tick the right boxes.
Right, back to when you apply for the loan!
As we’ve previously talked about, the banks will be checking your income. They want that income to be verified, preferably payslips and evidence of the funds being deposited into your bank account. The same with boarder and rental income, they want to see the boarder or tenancy agreements and evidence of the funds going into the accounts. The banks and your mortgage advisers look at your statements to check what you are spending the money on. The banks do not believe that you will change your ways when you get a loan so you need to be operating your accounts as if you had the loan already.
When you get a loan for purchasing a home the loan term is typically for a period of up to 30 years. The length of your loan will be limited by your age as the banks will want you to have your home loan repaid by the time you are 70, and preferably before.
Many banks are no longer providing loans of over 90% even to new home buyers. Income servicing will be key. Many of the banks are no longer taking on new clients looking to get home loans. Banks consider you to be “new to bank” if you do not have your pay going directly to their bank for at least 3 months. This can mean that if you are thinking about getting a loan you need to be thinking up to 3 months in advance and being strategic about which bank you are using for your income as that will put you in a better position when you apply for lending.
Another reason that working with a Financial Adviser is very helpful in the lead up to buying a house – we can advise you on which banks will best suit your circumstances as we are not working for one bank, so we have an impartial overview of many lenders. It may be that there are things you can do NOW to get into a better position to get finance in the future.