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Equity no longer a sure thing when it comes to finance

Equity no longer a sure thing when it comes to securing finance

New Zealanders continue to top up their mortgages at a steady clip, but more and more home owners are discovering that the equity in their homes is no longer enough for bank approval – even if they want to use the money to add value to their property.

Auckland mortgage broker and principal of integrated financial services provider LoanPlan, Christine Lockie, said today that the banks are putting means, income and cashflow ahead property equity as a criteria for loan approval.

"It would appear that many home owners don't want to risk selling their properties if they are unable to replace their existing home within their affordability.

"Instead they're looking to stay put and renovate. However, often increasing an existing mortgage is not easy even when there is good equity."

Ms Lockie said that even if the new Reserve Bank restrictions do slow down the property market for investors it will not necessarily make it any easier for new home purchasers requiring mortgages (it will, however, make it easier for cash buyers).

It is important for homeowners to remember that while the Official Cash Rate (OCR) may be low at the moment, banks do not assess affordability against current interest rates.

"It's all about affordability and how much cash you have left over at the end of the month. Banks will calculate the ability to repay debt at interest rates of, for example, between 4.85 per cent and 7.65 per cent – each bank has its own assessment interest rates.

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"The price rises in Auckland and regional areas have diminished the weight that equity used to carry. Added to this are factors like the Responsible Lending Code that banks must abide by. I would suggest that the banks are no longer what we would call equity lenders — it's affordability, income and lifestyle that count."

Ms Lockie said the people who are asset rich but cashflow poor are going to struggle to get finance.

"It is definitely a new development, and I would go so far as to say that even mortgage brokers like myself will be reluctant to refer cashflow poor homeowners to non-bank lenders because we, too, have responsibilities to ensure that any lending is affordable for the borrower.

"Mortgage brokers should not dig holes for these people, and where we do use non-bank lenders, we need to be sure we can refinance the borrower back into the banking system as soon as possible – getting a 'yes' on a loan application is no longer the be-all-and-end-all of property finance," she said.

Ms Lockie said that while there is a strong likelihood that the Reserve Bank will reduce the OCR further, this may or may not influence the variable rate that banks offer – she expects, however, that the longer term interest fixed rates are only going to go up.

"I believe we are at rock bottom on long term fixed interest rates.

"My advice to borrowers is that the better value on your home does not necessarily make you rich because it's all relative. Be sure you have the income to cover the repayments of your required debt at considerably more than the current bank rates, and do not be seduced by the OCR – it is not an absolute measure of what interest you will end up paying," she said.


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