It seems imminent that the Reserve Bank will impose its debt to income ratio (DTI) restriction tool for new borrowing as early as March 2024.
So, what is a DTI and how will it impact you?
That is exactly what we are exploring today, along with a quick peek at what’s been happening in the property world in the last month.
What Is A DTI?
A debt-to-income ratio (DTI) is a calculation used by lenders to assess a borrower’s ability to repay a mortgage. It is calculated by establishing the percentage of a borrower’s gross income that is used to repay debt, including the new mortgage payment.
As we know, The Reserve Bank has been proposing the introduction of a DTI restriction. The DTI restriction would be a control that would limit mortgage lending to borrowers. For example, if the DTI was set at 6.0, then a borrower’s total debt repayments (including the new mortgage payment) cannot exceed 6 times their gross income.
The DTI proposal has not been implemented yet and is still under consultation. The earliest it would be introduced is March 2024. And it’s also important to note that even if DTIs are introduced, different lenders may have different DTI requirements.
So, it’s always best to seek guidance from a mortgage adviser as they will understand the criteria for mortgage borrowing from specific lenders.
How Could A DTI Impact Investors?
Will DTIs apply to investors? The answer is kind of.
There will be an investment class, as well as a non-investment class for the DTI restriction. There is also an allowance for banks to work outside DTI rules for certain clients, as they have done with low-deposit buyers.
So, how do you qualify for an exemption? Well, no one really knows at this point. It is likely that clients with a lot of equity (so, upwards of the current 40% minimum), clients with a larger portfolio of investment properties, or those that have proven borrowing (and servicing) power from a specific bank.
How can we work with DTIs?
When calculating DTI all short-term debt commitments are taken into account. When considering applying for a mortgage, it’s a good idea to clear and close all non-essential debt commitments such as credit & store cards, personal and car loans, and all Afterpay-type credit arrangements.
As always, the best idea is to seek expert advice before making any moves. Don’t rule yourself out, as you may be surprised by what could be possible with the right strategy.
What’s Been Happening This Month
Mortgage Rates Exceed Stress Tests
If your mortgage is about to come up for renewal, you might be feeling the pinch right now. Here’s why:
In May’s Financial Stability Report, the Reserve Bank found households that borrowed during the period of very low-interest rates between late-2020 and late-2021 (when the market was running hottest) were stress-tested at rates below what they are today.
“Therefore, some of these borrowers and other borrowers with high debt-to-income levels may begin to struggle to meet their repayment obligations as they reprice onto the higher rates,” the report read.
What does it mean? Well, if you are earning at the same rate you were when you borrowed and you’ve recently refixed your mortgage rates, the repayment amounts could be higher than what your income was tested for.
So, if you are worried about meeting these repayments, it’s time to have a chat with the team here at Oliver Bromfield Mortgages so that we can explore whether your current loan structure is the best fit for you still. Get in touch with us now for an obligation-free chat.
Property Market Slows Right Down
Winter usually causes the property market to slow, but it seems winter has come early this year. Barfoot & Thompson have reported that Auckland house sales are at a 22-year low. The sales decline was 38.2% down in March and the median sale price was down 2.9% at $995,000. It’s the first time in 16 months that the median sales price has fallen below $1 million.
But the market slump is not only confined to Auckland. Average home values are down by $114,600 nationally. So, what does it all mean?
Well, if you are selling, you will need to be realistic about your price expectations. However, if you are looking to buy, there are some excellent bargains to be had. Before you make any decisions, the best option is to speak with a financial adviser to see what is possible for your situation.
Is Now a Good Time to Buy?
The market is slowing, and interest rates are still high, is now really a good time to buy your first home? Well, any time can be a good time to buy if you understand what is happening in the market.
Yes, interest rates are much higher than they were even a year ago. But, the property market is slow, so there are some good bargains to be had and less competition, especially at the lower end of the market. And there is great government support to allow first-home buyers to secure mortgages.
Property is seen as a good investment here in NZ, as the values generally trend upwards in the long term. So, investing in property now will get you on the ladder and could yield good capital gains in the future.
Where Are Interest Rates Heading?
At a recent Kiwi bank function, its economist boldly predicted that interest rates will start to fall around November this year. His view is that Inflation has peaked, tourism is back at pre-covid levels and there will be a drop in wholesale markets.
He believes that the Reserve Bank is likely to increase the OCR at the next review only to prevent later regrets, but that will be the last of the increase. He waged a bottle of whiskey on this…. 😃
READ MORE BLOGS ON OUR WEBSITE
As always, before making any moves in the market, the best thing is to understand your own financial situation and what is possible.
Whether you’re a first home buyer, looking to refix your mortgage rates, or considering investing in property, we can provide you with the trusted, expert advice you need.
So, get in touch with the Oliver Broomfield Mortgage team today.
Until next time,
Frequently Asked Questions
The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.
We help assess all your options, whereas the Bank is restricted by being only able to present one view.
While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.
Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.
Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.
Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.
A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.
Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.
While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:
- The ability to access low equity loans
- Using your Kiwisaver contributions towards your deposit
- Building your own home
- Accessing parental assistance to increase your deposit.
The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.
Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).
In particular, they are looking at how well (or not) you manage your account.
Do you have dishonors, and or unauthorised overdrafts?
The better your account conduct the better your chances!
The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.
This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.
The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.
As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.
A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.
Your solicitor should review this document.
Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.
Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.
To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:
Be purchasing your first home;
- Have been a member of KiwiSaver for a minimum of three years;
- Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
- Intend to live in the property for at least six months
- We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
- If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.
Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:
- A Registered Valuation ($800 – $1,200)
- Solicitor Costs ($800 – $1,500)
- LIM report ($150 – $400)
- Builder’s Report ($100 – $500)
- Weather Tightness Report for Monoclad houses ($300 – $1,000)
- Finance fee for non-bank lending (~1%)
Prices can vary. Always request a quote before ordering any of these services.
The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.
Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.
It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.
Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.
We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.
While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.
We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.
We can also be audited at any time by the FMA (Financial Markets Authority)
No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.
We sit alongside their other channels such as a bank branch or mobile manager.
The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.
For this reason, it will cost you no more to use our services.
Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down. If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback). In this instance, the mortgage broker has essentially done the work for no pay.
We reserve the right to charge for our time if a clawback is incurred. The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour. Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.
If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.
If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting. If it will be an Investment Property, you should discuss with your Accountant. We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.
Refinancing creates an entirely new mortgage and an opportunity to restructure in a way that better suits your personal situation.
People refinance for lots of personal reasons, from changing circumstances to life goals and interest rates.
People often refinance with us because they want to get ahead faster and take advantage of the smart Go Home Loan structure and personalised support we offer.
The key to an effective loan structure is putting your savings and income into an account that helps reduce the daily interest costs of your mortgage, not a separate unlinked account.
Why? By combining all your income and savings against your Go Home loan, you’re making your money work harder for you.
A Go Home Loan is a much simpler mortgage structure that still uses your income and savings to reduce your daily interest costs.
Generally, banks offset your money from multiple accounts. Some clients find it difficult to track multiple accounts and figure out how much interest is being charged or offset.
We find that using a Go Home Loan is an effective loan structure by putting your savings and income into an account that helps reduce your daily interest costs.