Home loan affordability worsens as loan limits near; banks tighten decision making; expert advice now more important

Facing the worst home loan affordability in three years, first home buyers are now having to scramble to get low deposit loans ahead of an expected clampdown by the Reserve Bank.

Mortgage brokers report banks are toughening their lending criteria and reapplying penalty interest rates for low deposit borrowers ahead of an announcement expected within weeks of a 'speed limit' on the growth of low deposit lending.

Application waiting times have increased in recent weeks as banks look to ration their low deposit lending and slow lending growth.

The scramble for loans and the uncertainty over the Reserve Bank's speed limit has darkened the outlook for borrowers just as the Roost Home Loan Affordability reports showed a further slight worsening in June, thanks to another rise in house prices.

"Banks have certainly toughened their decision making in recent weeks as they prepare for the Reserve Bank's restrictions," said Roost Mortgage Brokers spokeswoman Colleen Dennehy.

"Borrowers who have expert advice from a mortgage broker will find it easier to negotiate in this more complicated environment," Dennehy said.

The Roost Home Loan Affordability report for June showed affordability for regular home buyers worsened across most of the country and remains at its toughest in the biggest cities of Auckland, Christchurch and Wellington, where housing supply shortages and a fall in fixed mortgage rates over the last year have heated up the housing market.

Life looks set to get even tougher for first home buyers in the big cities if, as expected, the Reserve Bank puts 'speed limits' on the growth of low deposit home loans and does not include exemptions for first home buyers. About a third of mortgages with deposits of less than 20% are to first home buyers.

Roost Mortgage Brokers had already seen some banks tighten their rules around low deposit lending over the last 6 weeks in response to Reserve Bank pressure, she said. Some banks had reduced their availability of 80% plus mortgages through tougher lending criteria or effectively increased interest rates for very low deposit mortgages.

 The Roost Home Loan Affordability reports showed a slight deterioration in Taranaki, Wellington, Canterbury, Otago and Southland because of higher house prices. Affordability worsened more markedly in all parts of Auckland except West Auckland because of house price inflation that is running at an annual rate of almost 20%.

Only interest rates remaining near record lows is stopping a further worsening, the Roost Home Loan Affordability reports show.

It is toughest for first home buyers in Auckland. It took 89.9% of a single median after tax income to afford a first quartile priced house in South Auckland in June, while it took 99.9% in the North Shore.

Affordability on the North Shore is at its worst level in 3 years, although it remains below its worst ever levels of 107.3% of income required in November 2007 when interest rates were over 10%. They are now closer to 5%.

Nationally, affordability for someone on a single median income worsened by 0.2% in June from May, which meant it took 56.5% of after tax income to afford an 80% mortgage on a median house, according to the Roost home loan affordability report released today.

Fixed mortgage rates, which more than 50% of new borrowers now use, rose slightly in June and after-tax wages rose just over NZ$1 per week. A rise in the national median house price to NZ$394,000 in June from NZ$392,000 in April was the main cause of the deterioration.

Housing affordability is shaping up as a major economic and political issue. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls in May that would see the central bank impose limits growth in high loan to value ratio mortgages. Central and local governments are also moving to address housing supply shortages. Opposition parties have called for the bank to exempt first home buyers.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was also a deterioration in affordability in most cities.

It now takes 48.3% of a single first home buyer's income to afford a first quartile priced house nationally, unchanged from 48.3% a month earlier, but first home buyer affordability worsened in the three biggest cities of Auckland, Christchurch and Wellington.  The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 22.4% of a young person's disposable income to afford a first quartile home. The least affordable is the North Shore of Auckland.

Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.

For working households, the situation is similar, although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 37.1% of their after tax pay in May to service the mortgage on a median priced house. This is up from 37.0% in April.

On this basis, most smaller New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group.  This household is assumed to have one 5 year old child.

For households in the 25-29 age group (which is assumed to have no children), affordability nationally was unchanged at 23.4% of after tax income in households with two incomes required to service the debt.

Any level over 30% is considered unaffordable in the longer term for such a household, while any level closer to 20% is seen as attractive and coinciding with strong demand.

First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.

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Mortgage choices involve making a significant financial decision so it often pays to get professional advice. A Roost mortgage broker can be contacted by following this link »
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Full regional reports are available below: