With the relaxation of the Bank’s lending criteria on lending above 80% it would be pertinent time to compare the lending requirements for above and below 80% lending. 80% lending is not necessarily having a 20% deposit – it is where a loan is no more than 80% of the value of the property (or properties) that it secures. So when more than one property is involved the loan can end up being more than 80% of one of the purchase price but it could be under 80% of the property values. (NB the other security can be by way of a Third Party Guarantee ie a property owned by someone else Guaranteeing a portion of the loan).
DEPOSIT: 5% of the purchase price must be proven savings. Proven savings can also include Kiwisaver or Sale of an Asset.
INCOME: After the loan payments and any other financial commitments including living expenses Lenders want to see a bigger surplus in cashflow ie you have to have a higher income to borrow above 80% than if you did on the same loan under 80%.
FORMS OF INCOME: Some forms of income won’t be taken in to account above 80% eg Overtime, penal rates, non-taxable allowances.
RESIDENCY: NZ Residency is essential for all lenders when they are lending above 80% of the value of a property. However Non-NZ Residents are still eligible for a home loan but they would have to keep their lending under 80%.
TERM OF THE LOAN: Some lenders may insist on a shorter loan term in order to reduce bring the loan down to 80% at a faster rate.
PRE-APPROVALS: When the Reserve Bank first brought in the restrictions there could be no Pre-Approved Finance for above 80% lending. You had sign up on the property and then apply for the loan. This has relaxed a little HOWEVER we have seen many banks advising clients they should have their loan approved without taking all the details and encourage people to go and find a house and then submit a loan application. This is alarming because we find that for above 80% lending an accurate assessment can only be done with all the information being obtained. Sometimes people aren’t quite ready financially to purchase a home and they have experienced the disappointment of not being able to buy their new home once they have found it.
PRICING: This is the one of the biggest differences. Pricing above 80% is a lot more expensive than under 80%. Under 80% you can expect no application fee, substantial cash contributions from the lender and discounted interest rates. Above 80% not only are the discounts on the interest rates are not available but the interest rates may actually incur a Low Equity Margin ie a higher interest rate. There are no cash contributions. Registered valuations are usually required.
Our recommendation is:
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If you’re able to get the loan within 80% of the value of the property great but you have to weigh up the timing of this – if it takes a long time to build up a 20% deposit the market could have moved and by that time the purchase price of the property may have increased negating the advantages of having a bigger deposit
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Get in early to find out what all your options are. A mortgage broker/adviser is the best person to do this as they can offer several options and give you an accurate idea if now is the time that you can be looking and if not what you need to do to be able to be in a position to purchase a home
