A common misconception with borrowers, brokers and buyers is that the most important thing is how much deposit or equity you have. Whilst important, changes to lending standards have changed the focus over the past 12 months.
You will have heard rumours around ‘Responsible Lending Standards’ and ‘The Royal Commission’ but what does this mean for your average punter? Put simply, it means that there is an increasing shift of focus from the asset to the income.
The Reserve Bank implemented ‘LVR Restrictions’ and ‘Speedbumps’ in October 2013 which brought gearing against assets into sharp focus. This meant the public was limited to borrowing at a certain level against an investment or owner occupied property.
This focus however was misplaced. The intent was to ensure that those who purchased property had saved appropriately to do so. It ensured that the purchaser had ‘skin in the game’ which is important, however, it is likely a backward way of deflating an asset bubble.
It could be likened to jumping in a car worried about the airbags rather than the steering wheel. One will protect you in the case of an accident – the other more likely to prevent the accident all together.
Fortunately, the Reserve Bank have begun to change intent and Responsible Lending Standards have now placed focus on a client’s ability to service all their commitments. This has seen a shift in people’s borrowing capacity, which is no longer predicated by the value of their property, rather the income they generate.
If you can only service $500,000 then in all likelihood you can only borrow $500,000.00 even if your property is worth $2,000,000.
We are likely to see a return to yield.
We are likely to see more prevalent rental increases in the next six months across the board. This will be coupled with a continued softening and slowdown of the property market. As investors find it harder to borrow there will be less activity and a focus on consolidation.
It’s not all negative though. This change is likely to present opportunities as some investors will be looking to consolidate their positions and reduce exposures. These may be enforced by the bank as they find top-ups not as easy to come by or interest only roll-overs being denied. These situations should bring good stock onto the market at more affordable prices.
If you want to find out more about this - speak to one of our mortgage brokers NZ. They possess the knowledge of what you need to know about lending and as a first home buyer. Want an idea of how much you can borrow on your income? Let our mortgage calculators help you find out how much you can borrow, as well as estimate what your repayments would be.