Payback angst

Analysts have dismissed the idea that banks might insist on mortgage adjustments to offset falling values. 

A lending binge for the most part of this decade saw banks shovelling money out the door, offering to lend up to 100 per cent of a property's value, and in some cases even more.

Homeowners have had the fear of the bank manager put into them with suggestions that they could face demands to repay part of the mortgage or sell their house.

The suggestion, rubbished by banking experts, is based on the snowballing global credit crisis putting pressure on banks to reduce their exposure to the mortgage market.

A lending binge for the most part of this decade saw banks shovelling money out the door, offering to lend up to 100 per cent of a property's value, and in some cases even more.

The housing boom and rocketing values meant the loan-to-value ratio would soon reduce to a more acceptable level.

But Wellington economist Gareth Morgan claims that now the property bubble has burst and values are falling, homeowners should prepare for a call from their bank manager demanding they reduce the amount they owe relative to the value of their house.

People who had borrowed 90 per cent of the value of their house could be asked to reduce that to 80 per cent or less, or to sell it, he says.

Dr Morgan, who runs a funds management business, says the banks will be subject to similar demands from their foreign funders, concerned about the high level of household debt in New Zealand and falling property values securing those borrowings.

A good income, secure job and unblemished repayment history will stand for nought, he says.

Banking analysts have scotched the claims, pointing out that people are keeping up with their repayments and banks would not want to risk the enormous damage it would do to their brand.

Though businesses are finding it more difficult or more expensive to secure credit, suggestions that homeowners would be asked for top-up payments are over the top, Bank of New Zealand head of research Stephen Toplis says.

"It would send all the wrong sorts of signals."

ANZ National Bank chief executive Graham Hodges says banks "remain calm and measured" in their response to world events.

ANZ National is the biggest bank in New Zealand.

Mr Hodges says it is not logical that foreign bank investors could demand New Zealand banks lower their exposure to mortgages.

Banks borrow about a third of their money from overseas to fund their lending; the rest comes from domestic deposits.

Residential mortgages are among the safest investments for foreign investors, Mr Hodges says.

The Reserve Bank reiterated this week that the New Zealand banks are sound.

Mr Hodges says lending criteria have become more conservative this year as the ripples of the world financial crisis are felt here, but there has been no tightening in recent weeks.

Anyone wanting to borrow more than 80 per cent of a property's value must now get a valuation.

"The bank has taken a slightly more conservative approach, but the demand has dropped away significantly as people are being more conservative," he says.

For people who have a job and no reason to sell "the world hasn't changed because the value of your property has come down".

Banks expect property values to fluctuate over time. The key consideration is ensuring that homeowners can meet their repayments, Mr Hodges says.

"The loan-to-value ratio is of secondary consideration to whether people have got serviceability."

Banks also have flexibility in dealing with customers who find themselves in a tight financial spot and will deal with them case by case. "They are very few and far between. We are continuing with normal practice, and there is no reason for us to deviate from that."

The Reserve Bank has aggressively cut official interest rates, which are expected to be down to 6.5 per cent by the end of the year.

That will provide homeowners with welcome relief through cheaper floating and short-term fixed-term mortgage rates, but longer-term fixed rates could rise.

Mortgage Brokers Association chairman Darren Pratley says banks are still lending, but they are taking a much closer look at all applications and often requiring bigger deposits.

The 100 per cent loans are few and far between now, but as long as borrowers have a job, a proven savings history and a clean credit record banks are still interested.

Previously, banks had much greater discretion on lending criteria but now "all the ducks have to be in a row", Mr Pratley says.

Applications to fold consumer debt, such as deferred credit from retailers and credit card balances, into the mortgage are also coming in for closer bank scrutiny.

"They want to look a lot more at the personal factors involved, even what industry you work in."

Mr Pratley says there has been a sharp shift among homeowners - they now want to be sure they can afford the repayments without relying on future capital gain.

"It is time for taking stock and not getting too hysterical," he says.

- © Fairfax NZ News