Regular readers will know I'm part of the chorus of discontent about LVR restrictions being a poor instrument to use in cooling down the housing market.
That's because I believe using a demand side solution (i.e. an LVR speed limit) to fix what I see as a supply side problem (i.e. not enough houses) makes no real sense.
I realise there's a strong relationship between the availability of credit and housing demand but I still feel an LVR speed limit is a bit like seeing a panel beater for dental work.
Twelve months ago I went on record as saying an increase to interest rates would cool things down.
Isn't it funny how the property market seems to have buttoned off a wee bit right now at roughly the same time as fixed interest rates increased.
I guess it could all be coincidence but when the OCR goes up next year you watch what happens.
Still, the RBNZ had to do something and it can't have been an easy choice to make.
The trouble now is that all the belly aching we've been doing for the last six months has left first home buyers in a state of disarray and many have the got the wrong end of the stick.
So let's recap.
If you're a low deposit borrower (i.e. have less than 20% deposit) then getting a home loan has changed.
The change comes from the RBNZ and they require the registered banks to limit the volume of low deposit loans they make to 10% of their total portfolio.
Importantly, if they break the limit then their banking licence is at risk.
Notice how this framed in terms of LVR not 'category of buyer'.
It is a fact that most first home buyers will be caught here because they tend to have smaller deposits.
Property investors and people wanting to upgrade to their second or even third house could be caught too.
The defining factor is your level of input into the transaction not who you are.
Notice also that this is not an outright ban on low deposit loans; they're just not as available as they once were.
Also notice that the speed limit has a nasty consequence for the banks - if a bank breaks the limit they risk being shut down. That's a big incentive to get it right.
The initial impact is that the banks are not keen to approve loans where your deposit is under 20%.
They won't give you a pre-approval either. In fact, ASB will not honour low deposit preapprovals beyond October 4.
This is because the banks have a pile of preapprovals out there but no way of knowing how many of them will be used.
In turn it means they have no way of knowing if they'll break the speed limit or not until those preapprovals filter through the system.
So the door is mostly, although not entirely, closed to new low deposit deals at the main banks.
This means you can still find a home loan but you need to have a signed purchase agreement (conditional on finance) before the bank will give you serious consideration.
Non-bank lenders are not affected by the speed limit and they've become a viable 'broker only' option for hopeful borrowers with 10% deposit.
When you do buy a house you can expect to pay higher interest rates and fees than your counterparts with larger deposits.
Great interest rate discounts, big legal fee contributions and waiving low equity fees for the low deposit set was the story of 2012 but is now a fading memory.
Hope is on the horizon
First home buyers will have to deal with this environment for a while but I think there will be some relief in a few months' time because as the existing stock of pre-approvals expire banks will cautiously open the doors back up to low deposit mortgages again.
This could happen as early as February next year.
And with the ASB closing off all low deposit preapprovals from the end of next week they could be back in business sooner than most.
Don't expect a massive swing back but I think it's fair to say things will improve for the first home buyer once the initial impact has settled down.
Certainly the banks will be keen to attract more under 80% business in order for them to write the low deposit stuff. Read: more competition is likely in that space.
In the meantime, to maximise your chance of approval:
- Stay out of overdraft
- Pay off your credit card, in full, every month
- Keep paying down hire purchases and personal loans and ideally get rid of them
- Don't miss any of your regular bill payments
- Put away regular savings (as a guide, your rent + your savings should add up to the same as your prospective mortgage payments)
Campbell Hastie is a mortgage broker from Auckland firm Go2Guys. Read more of his blogs here.