100 per cent loans new norm for buyers

Houses have become so unaffordable that many mortgage brokers say the 100 per cent loan is fast becoming the norm for first homebuyers.

But financial experts are warning against the 100 per cent mortgages, saying softening house prices could leave buyers owing more money to the bank than their houses are worth.

Wellington-based Mike Pero broker Tony Sule estimates that about 40 per cent of first-time homebuyers are opting for 100 per cent loans as they are desperate to get into the market in case it becomes even less affordable.

Adam Parore, founder of Adam Parore Mortgages, agreed saying buyers with cash deposits were becoming rarer.

"I suspect another 50 per cent are at 5 per cent deposit, 10 per cent at 10 per cent deposit and almost none with a bigger deposit than that. The number of first home buyers with the standard 20 per cent is basically zero you get one every now and then, but they are like hen's teeth."

The rise of the 100 per cent mortgage, now available from all major banks, began in late 2005. They have become increasingly popular as house affordability drops a recent Massey University report found it had declined 70% in the past five years.

New Zealand's mortgage market is worth about $148 billion, of which about 40 per cent matures each year and must be re-fixed. It is not known how much of that is 100 per cent mortgages.

Evidence of the slowdown was apparent last week in the country's biggest property market, Auckland.

Figures from Barfoot & Thompson, Auckland's largest real estate agency, showed that the average house sale price fell more than $14,000 last month. The number of sales declined and houses were taking longer to sell.

BNZ chief economist Tony Alexander predicts the market could be weak for a couple of years, and Consumers' Institute financial adviser Steven Anderson warns there will be a fallout for buyers.

He is adamant that in any market, buyers should steer well clear of 100 per cent mortgages. "Anyone who takes a 100 per cent mortgage in the first place has rocks in their head... all you're doing is paying rent to a different landlord."

Banks should warn consumers of the risks involved, he said, "but ultimately people are still signing on the dotted line. Similar to finance companies they know the risk but they're still trying to go for the return.

"If you feel that you must take a 100 per cent mortgage then you have to pay it off as quickly as you possibly can."

Mortgage expert David Chaston said owing more than a house is worth "is a potential problem for people with 100% or 95 per cent mortgages".

The drop in house prices will affect people who bought recently much more than those who invested months or years ago, he says.

And "first-home" neighbourhoods won't suffer as much as the more "aspirational" suburbs. High-range mortgage clients in that category are in for a nervous time, Chaston says.

"It'll be spotty, but I would have thought that in Auckland, for example, anyone who was allowed to get a 100 per cent mortgage in an apartment will be in dreadful trouble."

But Chaston says some high-range mortgages are less risky than they appear, with customers using other properties as security or asking family members to provide guarantees.

ASB head of retail banking Ian Park said the bank was not seeing any deterioration in any of the factors it considered around 100 per cent mortgages.

"The only difference is the market itself is down on previous years, but we go through these cycles."

Park said clients must pass a "fairly rigid set of criteria" before being granted a 100 per cent mortgage.

"We're here to help customers, not help them get into trouble."

Westpac's senior housing manager Mike Davy said mortgage uptake across the board was "much, much slower" than this time last year.

LOAN CHOICES

Lenders are getting more innovative in their attempts to woo property buyers. A Sunday Star-Times survey reveals there are at least 23 types of home loans available. One of the new ones, from ASB's internet and phone banking subsidiary BankDirect, is the country's first shared home loan which allows up to six people to buy a property together. The TSB is offering a maximum mortgage length of 40 years five more than is advertised by any of the main banks. While a longer mortgage may make repayments more affordable, they add a huge amount to the interest bill. Some lenders are also offering 102% loans which, although uncommon, are available often through mortgage brokers. This allows people to also borrow money to pay for the mortgage fees.

- © Fairfax NZ News