Category Archives: Mortgage Broker

How do interest only mortgages work? Learn more here!

Interest only mortgages, often referred to as IO or principle relief, can work for you in certain circumstances, but you need sound financial reasons. In this blog, we look at how IO mortgages work. We also look at what you need to know, if you’re considering this option.

What is an interest only mortgage?

With a ‘standard’ mortgage, your regular payments pay the interest owed for the period. You also pay a small portion of the original mortgage amount (also called the ‘principle’). This means the mortgage amount reduces over time. The interest is charged as a percentage of the amount owed; so the interest payments reduce also.

With an IO mortgage, you pay only the interest portion. You’re basically paying for the cost of having a mortgage, not reducing your debt. Rates for interest only mortgages are the same as for standard mortgages.

How do they work?

The mortgage criteria differ from lender to lender. If you’re looking at getting an IO mortgage, go through a mortgage broker. You’d do this, to save yourself a lot of time and frustration in trying to work out which lender can give you what you need.

Generally speaking, you need to have an LVR under 80%. Usually banks will allow this against a owner-occupied property for a maximum of two years. For an investment property, this would normally be for a maximum of 5 years.

They will also calculate affordability over a shorter timeframe. Let’s say repayments were being calculated for affordability, if paying it off over 30 years. If a client wants a 2 year principle relief mortgage, the bank will then calculate affordability over 28 years. The payments will then be higher and therefore the client’s income will need to accommodate that.

Do Second Tier / Non Bank Lenders offer interest only mortgages?

Second tier lenders sometimes accommodate this structure, but only on mortgages up to 90% LVR. They’re also more flexible on the period limit and how affordability is determined. When a bank can’t accommodate a client a second tier lender can be a good solution.

Some lenders will allow clients to have revolving or offset accounts with an interest only mortgage. This means the client will be able to have money in an account that “pays down” the principle, but that money can be withdrawn if needed. This is a great way to reduce payments in the short term.

Platinum Mortgages has a mortgage calculator that can be used as an interest only calculator. Have a play with this tool; looking at interest only versus principle and interest will help you understand the cost of going interest only for a period.


Is this structure a good idea?

As a general rule it’s best to pay off as much principle as you can, as quickly as you can. This approach will save you a lot in interest costs over the life of your mortgage.

Having said that, there are instances where it may make sense to get an interest only mortgage for a period. A common reason is a homeowner wants to put the money towards renovating their property for the first couple of years, thereby increasing the value of their asset and improving their quality of living. Lenders are obligated to lend responsibly so will want to understand the reasons for going interest only.

This strucuture falls into the ‘special circumstances’ category of mortgages, which is very much our wheelhouse. If you are looking for an interest only mortgage, or indeed any sort of mortgage, reach out, we can help.

 


 

Mortgage Application Rejected , Home Loan Denied, Declined Home Mortgage

How soon can you re-apply after your mortgage application was declined?

We hear the phrase “My mortgage application was declined” on almost a daily basis. With the current tight lending rules, having a mortgage application declined by the bank is an all too common occurrence. It can be very discouraging, but don’t lose hope; there are usually options available to overcome your home loan obstacles.

It is not over if your mortgage application was declined

It’s usual for a bank to require a 3-6 month stand down after they decline an application, after which you can reapply. They’ll inform you of the actual period as part of the application process. But (more importantly) there is nothing to stop you applying straight away with another lender. The key thing is to understand why you were declined by your initial chosen lender. You can then take any action needed to rectify the issues.

Form showing mortgage declined

The importance of using a mortgage broker

We realise that a mortgage broking company saying you need a mortgage broker is hardly impartial advice. But our reasoning is compelling. Your mortgage broker will be able to look at your situation and walk you through why you were declined previously. They’ll then be able to advise you on what needs to be done to be successful in getting a home loan. They’ll look across all lenders, and with their industry knowledge of what the current acceptance criteria is from lender to lender, they’ll know where you are likely to be approved. This is huge, as lending criteria is individual to each lender and it changes all the time.

Understand why your mortgage application was declined

The majority of applications get declined due to one or more of the following reasons:

  • Not enough deposit
  • Not enough income
  • A bad credit score

Once you understand why you were declined, you can discuss with your mortgage broker whether a different bank may accept your application. The banks each use different formulas when assessing whether a mortgage meets their “affordability” threshold. An application could be rejected for not enough income at one bank but accepted at another. Banks sometimes offer mortgages at under 20% deposit, your mortgage broker will know if this is an option currently available and whether you would meet the criteria.

If none are likely to, that leads us to…

Banks aren’t the only option when looking for a mortgage

The stringent lending rules among the banks can mean that an applicant who is perfectly capable of servicing a mortgage still gets declined by the banks. This is where a non-bank lender/second tier lender can be a good option. They accept many applications that the banks decline. The flipside is they charge higher interest rates, but many people find it a worthwhile compromise to get on the property ladder.

If you do go with a second tier lender, make sure to make a financial plan to get yourself in a position to move to a bank within a couple of years to avoid paying higher interest long term.

Non-bank lenders are often a good fit if:

  • You’re newly self-employed. Usually the banks don’t approve lending to someone who has been self-employed for less than two years.
  • Your income doesn’t meet the banks’ standards (but is still high enough to service a mortgage without hardship).
  • You don’t quite have enough deposit for the banks.
  • You’ve been recently discharged from bankruptcy.
  • You have a low credit score.
Mortgage denied

What to do if you don’t currently meet the lending criteria or your home loan is declined

Next steps if you don’t have enough income

Reducing any debt is often the best place to start increasing your income. The banks minus any loan repayments when calculating your mortgage, and they assume the repayments will continue indefinitely. So if you’ve got any loans close to being paid off it could be worth doing so sooner rather than later. Of course, this could eat into your deposit so it’s a balancing act.

The banks also assume any credit cards or overdrafts will be maxed out. Therefore they calculate your income on the basis you will be making the maximum payments each month. They don’t take into account whether or not you pay your credit card off each month. Reduce your credit limits where possible, or better yet, cancel your credit cards and overdrafts.

Beyond reducing debt, increasing income can be tricky. Kiwi’s aren’t great at asking for a raise but if you can find the courage then it could be the difference between getting your own home or not. Look for opportunities for career progression within your job or even a job change if it will provide more opportunity and salary. We know these are not easy changes to make! If you do decide to go for it, make a plan and break it down into steps. Focusing on one step at a time will make the big moves feel much more manageable.

Next steps if you don’t have enough deposit

If you don’t have enough deposit, make sure you’ve looked into using your KiwiSaver and whether you qualify for the First Home Loan or First Home Grant. If it’s a matter of saving more, then make a budget and put savings aside regularly. An automatic transfer of your budgeted savings to a separate account each pay day can really help you stay on track.

Next steps if you have a bad credit report 

As advised previously, second tier lenders are often a viable option for those with bad credit scores. Don’t assume you don’t have borrowing options without first speaking to a broker.

If you have a bad credit score, make sure you check the details are correct. It can be a challenge to get them rectified, but is worth pursuing it if it changes your score from bad to good.

If your report is correct then it becomes a matter of improving your credit score. This means reducing credit limits, paying bills on time and paying off hire purchases! You could even consider completing a debt consolidation to reduce the overall interest rates being paid.

Ultimately, the steps you need to take and the options available to you when applying for a mortgage are very much dependant on your specific circumstances. So we hope we’ve convinced you that a mortgage broker is advisable whenever you are looking for a mortgage, but especially so if you’ve been going it alone and have had a mortgage application declined.

Platinum Mortgages specialises in mortgage solutions for those who can’t get straight forward approval from a bank. Reach out for a no-obligation chat about your circumstances and whether we can help.

What is the mortgage lending criteria in NZ?

Mortgage Lending Criteria in NZ

What is the Mortgage Lending Criteria in NZ?

Looking to buy a home and want to know what the banks will look at when considering your mortgage application? This article takes you through the mortgage lending criteria in New Zealand and provides information to better understand what to work towards.

Overview of mortgage lending criteria

When looking at an application, lenders will consider:

  • Deposit (LVR)
  • Affordability (income, debt, expenses)
  • Credit rating (risk)
Cost of Living in NZ - Mortgage Application Criteria
Concerns with Cost of Living in NZ – Mortgage Applications

Deposit criteria for mortgages

When talking about house deposits, the key term to understand is loan-to-value ratio (LVR). This refers to the percentage of the house purchase that can be covered by a loan, versus the percentage that needs to be covered by your deposit.

First home buyers

If buying your own home, the LVR at a main bank is generally 10% deposit for new builds. For an existing property, you may need a 20% deposit. Depending on their mortgage volume and internal policies, banks will sometimes lend over these LVR thresholds for a small number of mortgages.

If you’re a first home buyer you can use your KiwiSaver towards the deposit (if you’ve been in the scheme for at least three years). You also may be eligible for the First Home Grant. Find out if you fit the grant criteria here.

If you’re buying an investment property, you’ll usually need a 40% deposit to get a loan from a bank. If using a non-bank lender, you often only need 20%. Please note that with this option, there may be higher costs compared to going to a bank. New builds are exempt from investment LVR restrictions. With the right property, you can get a New Build bank loan with a 10% deposit.

Affordability criteria for mortgages

When lenders look at whether an applicant can afford a loan. They consider the person’s income, their debt, and their expenses/spending habits. They then calculate the mortgage repayments at approximately 7%. This is to ensure that clients will be able to maintain their loan, even if interest rates significantly increase.

Income and debt

When calculating income, lenders take into account any current debt and the loan repayments. They also consider liabilities such as overdrafts and credit card limits.

If you have been self-employed for less than 2 years, it may be hard to get a mortgage with a bank. But don’t worry, there are other options outside of the main banks. Check out our blog how to get a mortgage if self-employed for less than 2 years.

Expenses and spending habits

At the time of writing (March 2022), the Credit Contracts and Consumer Finance Act (CCCFA) has made banks take a very conservative and detailed approach when looking at an applicant’s spending habits. Banks currently require three months of bank statements showing that your current spending habits allow for the mortgage payments. 

To find out how your expenses stack up:

  1. Use our mortgage calculator to find out what your approximate fortnightly mortgage repayment would be at 7% interest.
  2. Minus any rent you pay.
  3. The figure you’re left with is how much you need to save each fortnight over the three month period. These savings will be the proof that your spending habits can accommodate the repayments.

The government has indicated that they will come back with revisions to CCCFA in mid-2022 that will allow the banks to be more flexible and practical in how much weight they give to applicant’s spending habits. In the meantime, non-bank lenders are more flexible in their approach so may be a good avenue for some people.

Mortgage Lending Criteria
Home Loan Approval – Lending Criteria in NZ

Credit scores

Banks and lenders look at your credit rating to determine the level of risk involved in lending to you. If you are concerned about your credit rating and how it may affect your application, check out our blog how to get a mortgage if I have bad credit.

For more information on the subject of NZ mortgage lending criteria, check out our blog what do lenders look for in a home loan application. Or for advice and support specific to your own situation contact us, we’d love to chat about how we can help!

Mortgage Broker Services

Four Important Services That Mortgage Brokers Provide For Life

This article discusses four of the many important services a mortgage broker provides. The majority of mortgage broker information out there is in the context of buying a new house. There are however, many services they offer after a house has been purchased.

Why should I use a mortgage broker service when I already have a mortgage?

After the mortgage has been advanced then it is the start of a life long relationship. Mortgage brokers actually provide a number of valuable services throughout the life of your mortgage. These services save you a lot of time, effort, money, and stress. It’s worth finding a good mortgage broker and maintaining a relationship with them. Then, when you need advice or support, the broker will already know a lot about your circumstances. They will be able to efficiently give expert help.

Re-fixing your Mortgage Interest Rates

Back when you first got your mortgage, you will have decided on the period to fix the interest rates for. Usually a mortgage is split into various accounts with different fixed periods. This is to minimise the impact of a sudden increase in interest rates.

When a fixed period comes to an end, if not re-fixed prior, the mortgaged amount automatically goes on the higher floating interest rate. But it’s not a hard deadline. You can at any point, chose to go from the floating rate back to a fixed rate.

The period you would chose to re-fix for depends on a number of things:

  • When your other mortgage accounts are due to come up for refixing. This matters in order to keep minimising the impact of increases in interest rates. Your mortgage broker can talk you through how the various timings of your fixed accounts fit together.
  • Your plans for the future. Any planned changes to your financial circumstances need to be taken into account. Your broker can talk through with you whether your plans mean a shorter or longer fixed period would be best.
  • The economic outlook. Are experts predicting interest rates will rise or fall over the next period? Of course, no one actually knows the future, and predictions are often wrong. Chat with your broker about the general outlook; how much weight you give to financial forecasts is up to you.

Once you’ve identified the best option with your broker, they can then liaise with the lender to complete the process.

tile showing services mortgage brokers offer
Mortgage advisers provide numerous services

Getting a Top-Up on your Mortgage

You can pull equity out of your mortgage by applying for a top-up. This means increasing your debt in order to free up cash. As you are taking on more debt this option isn’t to be taken lightly but there are plenty of circumstances where a top-up is appropriate.

The most common reason for a top-up is to fund repairs and renovations on your property as needed. As well as increasing the value of the property, it can make a big difference to your quality of life – especially these days when we’re spending more time than ever at home. Mortgage Brokers also know what to look for in a new mortgage application.

Whether this is a good approach financially depends on specific circumstances, but some common reasons are:

  • Upgrading worn and dated areas of the house, usually the bathrooms and the kitchen. Or your house may need an exterior/interior repaint or new carpet and curtains.
  • Future proofing. This is less fun than getting a new kitchen, but it’s important! We’re talking about replacing the roof, insulating, rewiring, fixing foundations or resolving water tightness issues. Getting on top of these jobs will save you the expense of future damage and will make your home safer and healthier.
  • Major renovations. Perhaps adding rooms to accommodate a larger family and increase the resale value, or an additional dwelling to make your property home and income. Making an older home open plan can also add a lot of value and result in many more interested buyers when you go to sell.
  • Elevating your living space. Swimming pools, outdoor kitchens, landscaped gardens. They take your home from being a house to being a sanctuary, a place that you can enjoy and someone would love to buy.

Your mortgage broker will explain the top-up process to you and identify whether you are likely to be approved, based on your financial circumstances. Importantly, they can calculate the long-term cost of adding debt to your mortgage so that you can make an informed choice as to the benefit vs the cost. Your broker will then manage the top-up application process with the bank for you.

Mortgage Adviser services
Mortgage Adviser Help – Top Ups for Renovations – Outdoor Living Spaces

Restructuring Your Mortgage

Ideally when you bought your home you will have structured your mortgage to suit your specific circumstances. Things such as your pay cycle, whether you receive a yearly bonus and whether you want your savings to offset your mortgage. Getting your mortgage structured correctly can save you thousands of dollars over the life of your mortgage.

But financial circumstances change, and your mortgage structure needs to change also to continue to be fit for purpose. Some common circumstances that result in a restructure are:

  • Your family is growing, and you need to make lower payments during a period of living on a single income.
  • You previously could only get a loan from a non-bank lender but now can get a loan at a bank with lower interest rates.
  • A pay rise may mean you can make bigger payments to pay your mortgage down faster and save a lot on interest.
  • A change in the markets may leave you with a fixed interest rate much higher than the current market.

Whatever your circumstances, your mortgage broker will help you identify whether a restructure is a good idea and make sure you understand any break fees that would be involved. They’ll then look at the options across the various lenders, identify the best options for you and then manage the application process.

Purchasing the Next Property

When go to buy your next home, or perhaps an investment property, don’t assume it’s best to stay with your current bank. Your mortgage broker understands the current offers of the various banks and can identify the best options for you. They’ll then manage the process with the bank. When it comes time to structure. Read further regarding getting a mortgage for an investment property.

We have highlighted only four core services. One of the things we love most about being a broker is developing a connection with clients and helping them throughout the years. If you’re looking for a mortgage broker to help you with either a current mortgage or to get a mortgage, apply now as we’d love to help.

First Home Grant

Can I get the First Home Loan or the First Home Grant? What you need to know

We’re all aware that there are more challenges than ever for first home buyers. So it’s important to know what support is out there and whether you are eligible when you start your first home journey. Two key options available are the First Home Loan and the First Home Grant.

What is the First Home Loan?

The First Home Loan is a scheme where the government underwrites mortgages. This means the government is carrying the risk of the mortgage instead of the bank and allows people with as little as 5% deposit to be approved for a loan.

What are the eligibility criteria to get the First Home Loan?

At the time of writing, to be eligible for a First Home Loan, you must:

  • Have a deposit of at least 5%.
  • Meet the income limits for the last 12 months. This is currently $95,000 or less before tax for a single buyer and $150,000 or less total before tax for 2 or more buyers, or for a single buyer with dependents.
  • Be a first home buyer or be in an equivalent financial position. This means no ownership in any other property (this doesn’t include ownership of Māori land).
  • Be buying a home you will live in. You cannot get the First Home Loan for an investment property.
  • Meet participating lenders’ eligibility criteria (income, debts, credit history). We can help you navigate this.
  • Pay a Lender’s Mortgage Insurance (LMI) premium of 1% of the loan amount.
Home approved thanks to First Home Grant

What is the First Home Grant?

The First Home Grant is a New Zealand Government grant, administered by Kāinga Ora – Homes and Communities. The grant is a cash contribution towards your deposit. Although it’s called the First Home Grant, people who once owned a house but no longer own property can still be eligible.

If you meet the eligibility criteria and are buying an existing home you get $1,000 for each year you’ve been in KiwiSaver, up to a maximum of $5,000.

The amount doubles if you buy a new home or land to build on, so you get $2,000 for each year you’ve been in KiwiSaver, up to a maximum of $10,000.

The grant is per person, so if you buy a house with a partner and your combined income is under the 2 buyer income cap, together you could receive up to $20,000!

What are the eligibility criteria to get the First Home Grant?

At the time of writing, to be eligible for a First Home Grant, you must:

  • Have contributed at least the minimum amount to KiwiSaver (or complying fund or exempt employer scheme) for 3 years or more. See KiwiSaver contribution requirements section for more details.
  • Meet the income limits for the last 12 months. This is currently $95,000 or less before tax for a single buyer and $150,000 or less total before tax for 2 or more buyers, or for a single buyer with dependents.
  • Meet the deposit requirements.
  • Not own any property (this doesn’t include ownership of Māori land).
  • Purchase a property that meets requirements, including your region’s house price cap. Check the property criteria here.
  • Agree you will live in your new house for at least 6 months from the settlement date, or for a new build, from the date the code compliance certificate is issued.
  • If buying a property with other people, be buying an equal share.
  • Provide proof of deposit, income and KiwiSaver contributions.
  • Be over 18.

Previous home owners in New Zealand or overseas may still get the First Home Grant. To be eligible, as well as meeting the standard criteria above, you must:

  • Have not previously received the First Home Grant or its predecessors, the KiwiSaver HomeStart grant or KiwiSaver deposit subsidy.
  • Have total realisable assets worth less than 20% of the house price cap for existing properties for the area you are buying in.
Savings from First Home Grant

How does the First Home Grant Work?

You apply for the First Home Grant on the Kāinga Ora website page. As part of the application process you will need to provide proof of deposit, income and KiwiSaver contributions.

You can apply for pre-approval before you look for a house. This is the recommended way, as it gives you certainty that you will receive the money when you find the right property. It also removes the time pressure when pulling together the documentation to support your application.

If you’ve already got a signed sale and purchase agreement, you can apply for a full grant approval as long as you apply at least 4 weeks before settlement day.

Next Steps

We can help you with your First Home Loan and First Home Grant applications as part of managing the mortgage process for you. Get in touch today for a no obligation chat.

What do lenders look for in a home loan application?

What do lenders consider when assessing a home loan application?

When preparing to apply for a home loan, it can be helpful to think in terms of what the lenders will look for. You can then determine how your own situation holds up. A mortgage broker will always be able to tell you how a lender is likely to view your home loan application but it’s useful to have an understanding of the topic to inform your conversations with your broker.

Put simply, the lenders will assess your:

  • Deposit
  • Income
  • Credit rating
  • Spending habits
  • Quality of information in the application.
Home loan applicat ions assessment include considerations of deposit, income, credit ratings, spending habits and quality of information

How much deposit do you need to get a mortgage?

Deposit for first home buyers

Most main bank lenders will accept 10% deposit for new builds and 20% deposit for existing properties. As a first home buyer you can use your KiwiSaver, as long as you’ve been in the scheme for at least three years. You may also be eligible for the First Home Grant.

You might be lucky and have parents who are able to gift or lend you money to get into your first home. But be aware that if the money is a loan the lender will take the repayments into account when calculating your income.

If you have less than 20% and want to buy an existing property you may be able to get a loan under the First Home Loan scheme, if you meet the criteria. Otherwise you may still be eligible for a mortgage with a bank or non-bank lender, depending on their current lending policy.

At the time of writing ANZ Bank have announced that they’ve “opened their floodgates” for existing clients with less than 20% deposit. Talk to us about whether you could get a low equity loan.

Next home buyers

As above, most main bank lenders will accept 10% deposit for new builds and 20% deposit for existing properties. ANZ Bank is currently accepting current customer applications with less than 20%. You can use the proceeds of the sale of your current house for the deposit, or you can get a bridging loan to buy your next house prior to selling your current one. In that case you would use the equity in your current house to get the bridging loan.

Deposit for investment property buyers

Most main bank lenders will allow for a 10% deposit for investment property new builds; whereas you generally need a minimum 40% deposit to purchase any established property as an investment.

Some non-bank lenders will assist a client with less than 20% deposit for a new build investment property, however the ‘difference’ in deposit needs to be made up via a personal loan (which the lender can organise as a separate loan). This would be factored in for servicing purposes. To qualify under these circumstances, the new build would need to have the title and code of compliance certificate issued and purchase settled within 90 days following loan approval.

You can use the equity from any of your current properties towards a deposit.

Credit score assessed during a Home Loan Application

How much income do you need to get a mortgage?

The answer of course depends on how much you’re borrowing. To get an idea, check out our mortgage calculator. Enter the amount your looking to borrow, set the period to 30 years and the interest rate at 7%. That is the approximate period and rate the banks test your affordability at. Note however that some banks require a 25 year term for investment properties. The period they will use also depends on how many working years you have left to repay your mortgage.

The calculator will then tell you what your repayments would be. If your income doesn’t perfectly match the bank’s requirements, don’t panic. Non-bank lenders have a different criteria and can often accommodate applicants that the banks decline.

Be aware that any debt you have will be taken into account when the lender calculates your income. They’ll also make the calculations on the assumption that your credit card and overdraft limits will be maxed out. They don’t take into account whether you never use the overdraft or if you pay off your credit card each month. For that reason, reduce down your credit card and overdrafts limits as much as possible. Or even better, cancel them outright! If you’re concerned about your debt, have a look at our blog on getting a mortgage when you have debt.

For those that are self-employed, the main banks will generally require at least two years of proven income. This means two years of accountant financials and IR tax summaries. If you have been in business for less than two years, have a read of our blog how to get a mortgage if self-employed for less than two years.

How does my credit score impact my home loan application?

It depends on the lender. Banks are reasonably conservative when it comes to assessing an applicant’s eligibility based on their credit score. Non-bank lenders are more flexible and risk tolerant, however they do charge higher interest rates as a result. See our blogs getting a mortgage with bad credit and getting a mortgage after being discharged from bankruptcy.

How do my spending habits affect my home loan application?

This topic is an evolving one. The recent Credit Contracts and Consumer Finance Act (CCCFA) has made banks much more conservative in their approach.

Previously, the banks took the practical view that people would change their spending habits once they had a mortgage. So they weren’t too concerned about your spending; unless it appeared that your spending was out of control (ie going into overdraft on a regular basis). They now require three months of bank statements that prove your current spending habits would allow for the mortgage payments.

To meet this requirement, use our mortgage calculator to find out your approximate fortnightly mortgage repayment would be, then minus any rent you pay. The figure you’re left with is how much you need to save each fortnight over the three month period. These savings will be the proof that your spending habits can accommodate the repayments.

At the time of writing (February 2022) many in the mortgage industry are lobbying for the CCCFA to be clarified to enable the banks to be less risk adverse. In the meantime, non-bank lenders have stayed more flexible in their approach so will be a good option for some.

The expected changes or updates to the mortgage lending criteria is expected to minimise or at least reduce the unintended negative consequence from the new CCCFA legislation.

The quality of the information in the home loan application matters

What happens if you don’t provide the correct documentation to prove all of the above? At best you’ll have to go backwards and forwards with the lender, at worst they may decline you outright. This is where a mortgage broker adds a lot of value, we manage the application process to ensure you’re putting your best foot forward when applying for a loan. If you’re looking to purchase a property or restructure a current mortgage, get in touch and we’ll help you get sorted.

Mortgage for Investment Property

Can I get a mortgage for an investment property?

Can I buy an investment property?

Many clients have asked me “can I get a mortgage for an investment property”.  So you are not alone. If you’re wondering if you can buy an investment property, read on. Investment , rental or income properties are one of the most popular ways Kiwis choose to invest. We take a look at how to best approach getting a mortgage for an investment property in New Zealand.

What do lenders consider when assessing an application for an investment property mortgage?

The rules

When considering a mortgage application, lenders must follow the Responsible Lending Code rules. In addition, the Credit Contracts and Consumer Finance Act (CCCFA) had changes come into force in late 2021. The result is that lenders now have to seriously take into account applicants’ spending habits.

What’s the impact of CCCFA changes?

Previously, spending habits were only an issue if they were extreme; it was understood that most applicants would reduce their spending (e.g. by eating out less) to accommodate a new mortgage if necessary. Now, applicants need to produce at least three months’ worth of bank statements that show their spending habits don’t eat into what is needed to maintain a new mortgage.

This approach can be frustrating for applicants and may mean action needs to be taken before a successful application is made. It can help to remember that the intention is to ensure that consumers don’t become overextended financially. That being said, at the time of writing (January 2022) the government has indicated they will review CCCFA to make sure it is fit for purpose for property buyers.

The calculations

Lenders apply a number of calculations to decide whether to approve or decline an application for an investment property. This includes:

  • Calculating any current credit cards and overdraft debt by their limits, not actual amounts owed. They don’t take into account how you use these limits. So paying credit card balances off each month won’t improve this calculation.
  • Calculating whether the applicant could afford to pay the mortgage if interest rates increased. This is usually calculated at 6-7% interest per annum. They take into account any existing mortgages as well in this calculation.
  • Calculating the mortgage payments using a shorter period. Some banks require an investment mortgage to be paid off over a shorter period than owner occupied, e.g. over 25 years rather than 30 years. Applicants would need to be able to afford the resulting larger payments.
  • Scaling rental income. Banks scale rental income by approximately 65%-75% to allow for periods of vacancies between tenants and other costs such as rates and insurance.
  • Under new CCCFA rules, current spending habits will be used to calculate whether the applicant can afford to pay the mortgage payments.

Non-bank lenders can be more flexible with their parameters when calculating whether or not to approve an application. This is due to their risk profile and the higher interest rates they charge. In some cases they can be a great option if the banks say no. It all comes down to the circumstances of the individual, we work with both bank and non-bank lenders so can match you to the provider for you.

Mortgage for Investment Property

How much deposit do I need for an investment property?

It depends on the type of lender and the type of property being purchased. In addition, lenders are always adjusting their policies. Generally speaking you’ll need 40% to get a loan from a bank, whereas you often only need 20% when using a non-bank lender (there are additional costs with this option). New builds are exempt from LVR restrictions, so with the right property you can get a loan with 20% or even sometimes as low as 10% deposit.

Do I need cash for my deposit, or can I use equity?

Either! It’s also common to use a mixture of the two. Most people buying an investment property need to use at least some of their equity (i.e value in their current properties) towards their deposit.

How do I use my equity to purchase an investment property?

Your mortgage broker will manage this process for you. Depending on your options, you may need to decide whether you want to reuse the lender that has your current mortgage or to hold a separate mortgage with another lender.

When using equity for an investment it’s key to understand how the LVR limits impact you and which lenders or banks are going to be appropriate for your situation. This is where mortgage brokers get a chance to shine!

How can I improve my chances of getting an investment property mortgage?

Clean up your debt

As much as you can, pay off any “bad” debt. This means laybys, car loans, after pay debts and layby debt. As mentioned above, when it comes to credit cards and overdrafts, lenders look at the limits, not what is currently owed. Ideally cancel any credit cards and overdrafts, or if that’s not possible, get the limits reduced as much as possible.

The challenge of course is that paying down debt tends to eat away at your deposit. It can be a balancing act for which you need advice specific to your circumstances. As always, talk to a mortgage broker.

Establish healthy spending habits

As advised above, lenders now have put a lot more weight on applicants’ spending habits when assessing a mortgage application. Review your spending habits and make a plan to reduce where necessary. Go for at least three months under your new spending regime before applying in order to have proof of changed habits.

Maximise your income

If you have any investment properties already, and you’re in a position to review the rents, make sure the rents are in line with the market.

If you’re employed and feeling brave, ask for a pay rise! A pay rise of just a couple of dollars an hour will give you the ability to borrow tens of thousands more.

Maximise your equity

Review the value of any current properties. They may have gone up in value considerably since they were last evaluated. This would dramatically increase the amount of equity you could borrow against.

Look for investment properties that lenders will approve

This means you want positive cashflow properties; i.e properties where the rental income is higher than the mortgage and expense costs.

Look for properties where you can borrow less and then add value by renovating. This will grow both the capital and the rental income. Or, look at buying a new build, which would give you the benefit of tax exemptions. The changes to the resource management rules is expected to result in a lot more new build opportunities in areas that are in need of more housing.

Remember you’re looking for an investment property, not a home for yourself. This could mean you buy in location nowhere near where you live, and a property that you wouldn’t be interested in for yourself.

As always, the best first step is to get in touch with a mortgage broker. We can assess your current situation and advise you of your options.

Contact us today!

New Zealand Debt-to-Income Ratios

New Zealand Debt-to-Income Ratios

Interest rates are on the increase, and the subject of debt-to-income ratios (DTIs) keeps popping up. So what is this? What does it mean for mortgages in New Zealand. We lay it all out for you in our article below.

What are debt-to-income ratios?

It’s a calculation to decide how much someone can borrow. The limit a person can borrow is decided by a simple calculation using their income.

How is DTI calculated?

DTI is calculated by taking the yearly income of the applicant/s and multiplying it by x to determine the maximum number they can borrow. For instance, if the debt-to-income ratio was set at 6 and the applicant/s earns $150,000 a year then they could borrow up to $900,000.

How are debt-to-income ratios used in New Zealand?

In 2021 the Reserve Bank was given the power to dictate DTI ratios to the banks and other lenders. They haven’t yet acted on this power. They don’t have immediate plans to do so and would go through a consultation process. Use of debt-to-income ratios, according to the government, would be focused at investors rather than homeowners.

While there isn’t yet an obligation to use debt-to-income ratios, some of the major banks have gone ahead and implemented their own DTIs. Other lenders have indicated that they may do the same.

How would debt-to-income ratios be different from current measures?

Currently, the borrowing limit is usually determined using loan-to-value ratios (LVRs). The size of the deposit determines the amount that can be borrowed – to a point. Lenders each have their own complicated affordability calculators. They use this to determine how much money a person could responsibly borrow. Income no doubt plays a main part in this calculation.

So, what does this all mean for borrowers?

In general, the purpose of DTIs is to ensure responsible lending, and to reign in the housing market. While this may limit people’s borrowing options, the aim is that this will keep prices in check. But what it means for you depends entirely on your circumstances.

As a consumer, it’s great to have an understanding of concepts such as debt-to-income ratios. Your mortgage is likely the biggest financial responsibility you’ll ever have so knowing how it works is valuable.

The key however, is to not get bogged down by financial policies and their possible ramifications for your ability to borrow. It’s our job as mortgage brokers to be across the current lending rules and policies. We’re then able to give you advice on how much you can borrow and which lender is best for you. Contact us to find out how we can help you.

Auction hammer used when buying a property at auction

Top Tips for Buying a Property at Auction

Best Tips for Buying a Property at Auction

Buying a property at auction can be a bit daunting so this article gives top tips for buying a property at auction. By design, auctions create a pressured environment where prospective buyers’ emotional brains kick in.

Feelings of competitiveness, desire and fear of missing out can take over the rational brain. For this reason, many real estate agents love them! Especially in a hot market or if the property is desirable. So it’s no surprise that auctions are especially common in Auckland.

The above sounds stressful, but it doesn’t have to be your experience. If you go into an auction well prepared you can keep a clear head throughout.

We’ve pulled together our top tips for getting through the process smoothly, without regret and hopefully with a new home to enjoy.

Image of an auctioneers hammer

Do your homework early

All auctions sales are unconditional. When the hammer falls, the successful buyer needs to immediately pay the agreed deposit. You are then also legally obliged to settle the full amount, on the settlement date. This means all due diligence and finances need to be sorted ahead of the auction.

Allowing as much time as possible for these activities is the most effective thing you can do to reduce any stress you may feel.

Sort your mortgage approval

Talk to your mortgage broker as soon as possible, in the “buying by auction process”. Ideally you’d have already got mortgage pre-approval, but even so the bank or lender will need to sign off on the property you’re bidding on. They will want documentation to inform their decision and may ask for further due diligence to be done on a property, if they identify any red flags.

The turnaround time of this process varies per company and can be longer during busy periods. Therefor, the longer you allow for this step, the better.

If you do find yourself up against a tight deadline, there are options available that give you finance quickly. There is a cost associated with this, but in some situations it can be the best move.

Auction hammer on table

Do your due diligence on the property

This is an important part of getting the property approved by your lender. So, get stuck in straight away.

The real estate agent will provide you a pack of documents. It’s then up to you to:

  • Decide whether a LIM or builder’s report is required. Your lender may require this prior to approving the property. Talk to your mortgage broker.
  • Check the title for any potential issues.
  • Check settlement date and chattels listed in the draft agreement.

Get your lawyer involved at this stage as they are experts in reviewing the fine print and looking for issues.

Decide your absolute top offer

The mortgage pre-approval will tell you what you can pay, now’s the time to think about what you’re willing to pay for the property in particular.

Take into account the market and the state of the property. Then think about what the property is worth to you. You want to identify ahead of time, what your absolutely top offer is so you can go into the auction with a clear point that you should stop bidding. It’s hard in an auction to make that final call, as if you were willing to pay $700,000 why wouldn’t you pay $701,000?

Find the threshold where you feel like you would have paid too much. You would then, set the top offer just below that. Of course, if that number is more than you can afford then go with the amount you can afford as your limit!

Get comfortable with the auction process

If you haven’t been to a property auction before, go and observe one. It will help you feel in control when you go to buy a property at auction and will give you some great insights ahead of time.

The part of an auction you won’t see:

You’ll see that the auctioneer won’t state the vendor’s reserve price, but they can place a vendor bid if the reserve price isn’t being reached. If the reserve price isn’t reached, the highest bidder may then go into negotiation with the seller.

This part also isn’t visible: The buyer will go into a room and the seller in another (if they’re on site). The seller’s real estate agent will go between the two and try and negotiate an agreed price.

If you need to consult with anyone, don’t be afraid to ask the real estate agent to leave the room so you can discuss your options. They will appear helpful and neutral, but remember they’re there to get the best deal for the seller. They will also be looking for clues, as to what your financial situation is and how high you can go.

Reframe what ‘winning’ an auction means

Remember, the goal isn’t to win at an auction. In fact, the word ‘win’ is emotive and misleading, you’re not winning a house, you’re buying one!

Your goal is to buy a house you want for a reasonable price that you can afford. Sometimes that will mean you don’t get the house you’re bidding for. It can be disheartening, but if you’ve done your homework and stuck to your plan then you can take pride in keeping a clear head and acting rationally. That in itself is a win at any auction!

For some helpful, accessible info on buying a property at auction we recommend the settled.govt.nz website.

If you’re looking to buy a property and haven’t got a mortgage pre-approval yet, that’s your first step. Contact us and we’ll help you get sorted.

Self Employed Mortgage

How to get a mortgage if self-employed for less than 2 years

Is getting a mortgage if self-employed for less than 2 years possible? Yes! Getting a mortgage within the first two years of being self-employed can be a challenge, but possible. However, if you recently took the leap and become self-employed, congratulations! Fortune favours the brave. There are many benefits that come with being your own boss, as well as some challenges.

Suddenly, getting approval for your holiday leave is very easy (although finding the time may be harder). But getting a mortgage within the first two years of being self-employed can be a challenge. That’s where having a good mortgage broker can make buying a home both possible and much easier.

In this article we’ll take you through how you can get into your own home without giving up being your own boss. That’s where having a good mortgage broker can make buying a home both possible and much easier.

Do banks approve loans when recently self employed?

Generally speaking, the banks require you to be self employed for more than two years. If you are self-employed, the banks will require:

  • Two full years of accountant financials;
  • Two years of IRD Tax Summaries.

The exception is when you’re not relying on your self-employed income to pay your mortgage. Of course that doesn’t apply to many people. But don’t worry, there are other options! Otherwise, this would be a rather short article.

Self Employed Mortgage

If the banks say no, how do I get a mortgage?

This is where non-bank lenders (otherwise known as second-tier lenders) really show their worth. They can provide home loans to people who have been trading for as little as six months.

Platinum Mortgages deals with non-bank lenders who provide a genuine ‘low doc’ mortgage for our self-employed clients. This means less documentation is required to support your application compared to a bank. This reduces both time and stress on your part. Even better, no financials are required.

As a bonus, applications are processed promptly by our non-bank lenders. That’s no small thing these days, when the banks are often taking a long time to approve applications. Delays can cause a lot of stress for a client when they have put in an offer subject to finance. This is especially true when the property is nearing its deadline date.

Our non-bank lenders have a great track record in facilitating an easy finance process. We love seeing the benefits this has for our clients’ home-buying experience.

What do I need to get a home loan approved?

Recently self-employed can get a home loan approved, and here is how. At a minimum you need:

  • A trading period of 6 months
  • Your declared income must be within industry norms
  • Maximum 80% loan to value, subject to property type and location. This means the lender will need to approve the property you want to buy, just as a bank would.

Why can a non-bank lender give me a home loan when a bank can’t?

The non-bank lenders approve higher risk applications because they balance the risk out by charging a higher interest rate. This can sound a bit scary for clients. However, it’s a matter of calculating whether the cost is manageable and reasonable to get you into your own home. We help you understand how interest rates impact your mortgage payments. This way, you can factor it into your budget.

Non-bank lenders are a great as they to enable you to buy a home while you set up your business. After the two-year period is up, that’s the time we can help you move to a bank home loan with lower interest rates if your income and accounts are in order.

As to whether it’s worth paying a higher interest rate now or waiting to have been self-employed for two years to buy a home, no one can answer that for you. What we can say is, historically it’s how long you’re in the market that’s important, not when you buy your property. Meaning, it’s the amount of time you own property, rather than the timing of when you buy property, that gives the payoff on investment for most people.

How do I prepare for a loan at a bank after the two years?

The key thing is to have tidy and accurate financials for the two-year period, prepared by an accountant.

Warning: Don’t get tripped up by your tax returns

Being self-employed, you’re no doubt aware that how you treat your income and expenses determines how much tax you pay. Your accountant will most likely try to present your financial accounts in a way that reduces your tax bill. Ultimately, this means they will (where possible) reduce the income side of the balance sheet by increasing the expense side.

Unfortunately, this is usually the opposite of what you need to show to get a mortgage from a bank! You want your documented income to be as high as possible to prove that you can pay your mortgage.

This also means that any “cash jobs” (which we’re sure you never do) don’t get counted as income and detract from your ability to get a mortgage with a bank.

Platinum Mortgages is experienced in reading financial accounts and have skills in extracting several items within them that can be added-back into the income side. So, we can help you ensure that your accounts are in a good state to get you a mortgage at a bank once you’ve been employed more than two years. We’d love to talk with you about your plans and how we can help you buy your own home.