Ray of hope shines on housing market
It's a tough time to be a-hunting for a home. House prices are heading through the roof in some cities, right at the same time as record low interest rates start to evaporate.
To add to the air of despondency, the Reserve Bank is bringing in strict new rules which drastically cut the number of loans doled out to borrowers with small deposits. But don't resign yourself to a life of being stuck in a crummy rental just yet.
There's still one way to avoid the restrictions and buy a home with a small deposit, without resorting to anything dodgy.
It's called a Welcome Home Loan - backed by Housing New Zealand, and offered by several local lenders.
Having been granted one of the only exemptions to the new rules, the scheme is about to become more popular than a cold beer in the Sahara Desert.
The Government has tripled the scheme's funding and made a raft of changes which come into effect on October 1 - the same day as the Reserve Bank's "speed limits".
This guide explains what the changes mean, and whether a Welcome Home Loan could give you a second chance to get your foot in the door.
Are you eligible? If you're earning big bucks, this loan isn't for you. You need to have an income of less than $80,000 to qualify, or $120,000 if there are two or more of you buying together.
You also have to be a citizen or permanent resident, actually intend to live in the house, and can't own another property.
But the big change is the requirement for a 10 per cent deposit. It's a step up from the previous rules, where you could borrow small amounts with no deposit at all, but still a lot easier than having to save 20 per cent that the retail banks now require.
Unlike most deposits, it doesn't matter if the money's gifted to you - so hit up your parents or Great Uncle George to get you started.
Location, location, location One of the main criticisms of the scheme formerly was that you could barely borrow enough to buy a shoebox on the worst street in town.
The changes have given the house price caps a much-needed top-up:
$485,000 - Auckland
$425,000 - Wellington City and Queenstown Lakes
$400,000 - Christchurch City, Selwyn Districts
$350,000 - Thames/Coromandel, Waimakariri, Hamilton City, Western Bay of Plenty, Hutt City, Upper Hutt, Kapiti Coast, Tasman/Nelson, Tauranga City and Porirua City
$300,000 - Everywhere else.
Advoco mortgage broker Steve McGowan says the scheme traditionally worked quite well in the provinces, but wasn't much use to Aucklanders.
There were plenty of properties in the original $350k price range, but not many stand-alone houses.
"It's when you start going to the terraced houses, the duplexes, then you've got issues," he says.
That's because banks require a deposit of at least 20 per cent for non-standard residential housing, and apartments are often treated even more harshly.
McGowan says pushing the caps higher will help to some degree. At the very worst, first-home buyers will have to get used to the idea that they can't jump into a four-bedroom mansion in a swanky suburb right from the word go.
The fine print Housing New Zealand's role is to insure the lending bank against the risk of you defaulting on the loan. The mortgage insurance fee charged on a Welcome Home Loan is 2.2 per cent, of which the Crown pays 1.2 per cent and the borrower pays the rest. That means you'd have to fork out a one-off $3000 to $5000 fee in the first year of your loan.
It might seem like a lot, but it's actually fairly standard. With the new lending conditions coming into force, banks have recently started hiking the fees they charge on low equity loans. Borrowing with a 10 per cent deposit outside the Welcome Home Loan scheme would cost an extra 1 per cent in fees anyway.
McGowan warns the one hidden surprise is that only the most pristine borrowers get a look-in.
"People probably thought the Welcome Home Loan might have been a bit more relaxed, but in fact their criteria was tighter than the banks," he says.
You'll need an impeccable credit track record - to the point where a single unarranged overdraft could send your application straight into the rubbish bin.
"The criteria they're really tight on is account conduct and credit rating," says McGowan. "On the few that I've done . . . they wanted six months of transactional bank statements, not three months that the banks normally ask for."
If the bank itself is giving you grief, you could try shopping around. Welcome Home Loans are offered by Heartland, New Zealand Credit Union Employees, Nelson Building Society, Kiwibank, SBS, TSB and Westpac. They'll each have slightly different lending criteria, so if you can't get it over the line with one, you could try your luck with another.
Welcome Home Loans clearly aren't for everyone - but they could bring welcome relief to a lot of struggling families.
Housing New Zealand's financial products manager Mike Adamson says the supply of loans available each year will jump from 845 to 2500 next month. "We are unable to accurately forecast what will happen from 1 October, but we are ready for an increase if it occurs," he says.
- © Fairfax NZ News