If you’re borrowing, NZ banks are now more different than ever
With interest rates continuing to rise, inflation, new lending laws, and what seems like a fresh headline about the NZ property market each week, it’s not the easiest to apply for a mortgage.
While rising interest rates are grabbing the most front-page attention, there are plenty of other things in the mix too.
In such a quick-changing environment, if you’re on the hunt to obtain a home, and first need a mortgage, shopping around between banks could be a great start. Read on to find out why.
Background: Bank Loyalty
Most of us are loyal to one bank, mainly out of convenience. It takes time and energy to switch bills, salary payments, and so-on to another bank, so we stay with our main bank and mostly give it little thought.
However, our trust as customers of the banking sector is eroding – if recent research by Consumer NZ is anything to go by. Consumer NZ recently reported three quarters (73%) of us think banks are charging too much and only half (52%) think they can be trusted, with almost all big banks surveyed scoring either below or close to average for customer satisfaction.
When it comes to buying a home, which is usually the biggest financial commitment of your life, your loyalty to your bank might be misplaced. In the present environment, there has likely never been a better time to seek out a better deal for your personal situation, especially when it comes to borrowing.
Bank Differences When Assessing Affordability
Affordability is the lynchpin of a mortgage application. Assessing how much a person can afford to borrow is the most crucial step that lenders undertake when anyone applies for a mortgage.
Despite what the banks online calculators might say, this is more detailed than it might first seem and is the part that might cause most potential borrowers to stumble.
It doesn’t matter how big your deposit is, if the bank assesses you as someone who would struggle to make repayments should mortgage interest rates rise, then you’ll be declined.
The major banks all vary when it comes to assessing your mortgage application. Below are a few examples:
Varying costs per dependent (child) are calculated by the banks.
When it comes to routine expenses, even if your spending is below a certain threshold, the banks will increase the overall level to something they think is a more reasonable estimate.
Most banks prefer to lend money to people with past and present stable employment. Anyone who’s a contractor, self-employed, or running a business gets extra scrutiny. Even a bad year recently, such as for someone who was self-employed and struggled due to Covid-19 lockdowns, is looked upon poorly by most banks.
However, some banks look on the self-employed and contractors a lot more favourably than others. If you're self-employed, but were recently a salary-earner beforehand, some banks will take into account those past PAYE earnings. Most banks will make assessments based on forward-looking projections, while other banks who consider people that contract to just one business, under the same policy as an employee earning a wage.
Several banks take KiwiSaver scheme payments off your income, even if the intention is to cease those payments.
Stress test rates (“test rates”)
A mortgage stress test determines if you’ll still be able to pay your mortgage should interest rates rise.
It provides rules that mortgage providers use to calculate if you qualify for a mortgage and how much you can borrow.
The mortgage stress test is used when you buy a home, switch to another mortgage provider, take out a homeowner line of credit or refinance your mortgage, but not when you renew or refix your mortgage with the same provider.
Even for those working closely with the banks, specifics of how the testing is done and what is involved is a mystery, and the government recently concluded an inquiry into how banks were conducting their lending.
Major NZ banks stress test home loan borrowers at slightly different interest rates, mostly around 7.5% at present, though this changes regularly.
Rent and board
The banks all assess rent or board in different ways. A key area is called ‘shading’, which is when banks reduce the sum you expect to receive in rent or board to account for vacancies, insurance, repairs, and the usual other troubles experienced by landlords.
So, when assessing a lending (mortgage) application, a bank might say that a person with an investment property whose tenant pays $650 per week will only receive 75% of that sum across a full year. This might not sound like much, but that’s $8,450 annually. An income difference like that can be the difference between buying another property or not!
Different banks might first shade the income, and then also account for rates and insurances, while some banks will ‘tax’ rental income for existing properties as the new legislation requires.
Over 80% lending
Banks have different capacities and requirements for low equity lending, and this appetite changes constantly.
Two major banks just closed their doors to all customers seeking over 80% lending for existing homes. Most banks can still grant unlimited lending to ‘exemptions’ (new builds) however, there are regulatory caps on how much lending banks can provide in this area. Even if you’re approved at this level, banks then impose different servicing requirements to compensate for the risk to them of the higher level of debt, including potentially higher interest rates. The difference between these rates can save or cost thousands. For example, one major bank put their low equity margin (a percentage amount, typically between 0.25% and 1.5% each year, that is added to the interest rate on your home loan) on top of the special rates whereas another applies it to their standard rate.
NZ Bank Differences in Interest Rates
Probably more than ever before in recent memory, we’re seeing major differences between the mortgage topic most of us focus on the most: the interest rate itself.
The changes are coming thick-and-fast, and at times, the interest rate pricing gap between major NZ banks can be as high as 1%. If that doesn’t sound like much, be mindful that on a $750,000 mortgage, there’s a monthly payment difference of over $600!
The Bottom Line: NZ Bank Mortgage Differences
To navigate variables between different banks, (and in a shameless plug for our own services!), the most effective way is to work with a mortgage adviser (broker) who is accredited with all the main banks.
Alternatively, you can shop around all the banks yourself, though it will involve a lot of paperwork!
If you’d like to arrange a consultation with one of our lending team to discuss anything above, it’d be our pleasure to assist, so get in touch today.