Getting “bank ready” in a tough market

Getting ready - close up of putting boots on

It’s tough being a borrower in this market! Particularly when every article you read in the media is doom and gloom about property prices and LVR restrictions. Without a doubt, it’s a hard time to be a borrower. Banks are unwilling to take risks and internal credit policies have successfully slowed the market. Obtaining approvals from lenders is getting harder and there are a number of reasons for this. The media have managed to scare first home buyers into thinking they can’t get into the market and that “affordable houses” are not anywhere to be found.

But it’s not all bad news… you can get loan approvals, and you can find property within your price range. You just need to know where to look and who to speak to. Getting “bank ready” is an important factor as well. Banks are more inclined to cherry pick clients so you should be doing more of the things that make you a good bet. 

Know the rules

The biggest thing that I see slowing down first home buyers at the moment is the old adage “you don’t know what you don’t know”. A lack of understanding of what you can and can’t do is slowing your decision making down. So, get experts around you who understand the rules and have your best interests in mind. 

Right now, real estate stock is low. Prices are flat in a lot of areas so if you can find a house for sale then chances are you can pick up a good deal. But given stock is low, the opportunity is in the new build space where builders are more willing to squeeze their margins to get throughput. These properties are exempt from reserve bank rules so your deposit requirements are much lower and more achievable. More importantly, the banks don’t have the same restrictions so your chance of an approval increases! There are plenty of developments happening Auckland wide where price points are within what we term “affordable”. Sure, you may need to look a bit further out than central fringe suburbs but if you want a home, that’s the price to pay.

Act as if

Act as if you already have a mortgage. A $500,000 loan at 7.5% over 30 years (banks current test rates) is going to cost you $810 per week. Add to that insurance at $70 per week and rates at $70 per week then you get to minimum cost of $950 per week. Take your existing rent off that – lets assume that at $550 per week – and you will ideally be saving remaining $400 per week. This may sound like a big number but this is what the banks are testing their applications at (it’s not the rate you will be paying) so if you can show that you are already servicing their minimum requirements then you are a big step closer to an approval!

What this also does is shows you whether or not buying a house is a genuinely good idea for you. If you can manage this situation without putting financial stress on the household then you’re in a good position to move forward. If not, then maybe look to re-evaluate.

Saving the deposit

Get stuck into Kiwisaver as early as possible. It’s the cornerstone of most deposits and the sooner you get started, the better. What I like is that it’s literally set and forget. You also get the added benefit of your employer contributing another 3%. If you can make it work, try tipping in 8% of your wages. Over 5 years you’ll save in excess of $40,000. If there’s two of you, then that’s an $80,000 deposit.

There’s then the additional benefit of a First Home Grant if you earn less than $85,000 as an individual and $130,000 as a couple, provided you are buying for less than $600,000 in Auckland for an existing property or $650,000 for a new property. The maximum grant is $10,000 for an existing dwelling ($5,000 per eligible borrower) and $20,000 for a new build.