NZ should look to Australian-style mortgage controls, broker says
The Reserve Bank has a better tool available to cool the housing market than setting maximum "debt to income" ratios, Squirrel Mortgages founder John Bolton believes.
Debt to income ratios are in place in some countries, and the Reserve Bank is looking at whether they can be used here in a bid to take the heat out of the housing market.
They are used to limit the amount households can borrow to buy a home to a multiple of their income, for example limiting loans to a minimum of four-and-a-half times household income.
Bolton says debt to income ratios are a "blunt tool", and reckons there's a better tool with more "finesse" being used in Australia by bank regulator APRA.
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"APRA sets the interest rates the banks need to use to calculate whether the borrower can service the loan," Bolton said.
And he's urging the Reserve Bank to consider doing the same.
All banks have an internal "test" interest rate they do not publish which is higher than their mortgage rates, which they use when calculating whether a potential borrower can afford to repay a loan.
Bolton said that in Australia APRA had taken control of the test rate, as well as telling lenders how to calculate the income available to a household to service a loan.
When APRA looked at bank credit tests several years back, it found banks were using different test rates and had different approaches to calculating the income potential borrowers had available for servicing loans.
In a bid to reduce risky lending, the Australian regulator effectively set a minimum test rate, and told banks what must be included when calculating income and expenses of borrowers.
Bolton said he had urged the Reserve Bank to investigate similar measures here rather than having broad debt to income ratios.
Affordable homes campaigner Hugh Pavletich is a supporter of debt to income ratios as a "necessary evil" until Auckland gets to a point where it is building enough homes to keep prices down to levels that are fair to the young.
Pavletich said the Central Bank of Ireland studied its housing crisis, and found that high debt to income lending was more financially risky than high loan to value (LVR) lending, and New Zealand had to learn from that.
But if the Reserve Bank does create debt-to-income ratios, it will have to be careful about how it designs them, Pavletich said.
History shows lenders are good at finding loopholes in rules and regulations.
When the LVR restrictions came in, banks found they could continue making loans by signing up first-time homebuyers' parents as guarantors on loans using the equity in their homes.
A young borrower with a 10 per cent deposit could have another 10 per cent of the purchase price guaranteed and secured against their parents' home, lifting them to the magic 20 per cent equity level, which in addition resulted in lower interest rates.
It's possible, say mortgage brokers, that first time homebuyers could sign up as joint borrowers for a home loan, adding their incomes to their children's for the purpose of calculating debt to income ratios, but only have to make repayments if their children failed to do so.
Mortgage broker Campbell Hastie from the Go2Guys says it would be possible, though banks would want the parents' house used as security too.
"You would have to have the children and the parents as borrowers with both responsible for paying the loan."
But Hastie said: "Whether or not parents would be all that keen to be borrowers is another thing. Most parents are keen to say their children can use the equity, but when it comes to responsibility for making payments is a different matter."
Hastie opposes the debt to income ratios, and would rather see further restrictions on investor loans than another measure that would shut first-time buyers out of the market.