Negative equity when property market slumps

Banks says homeowners with negative equity will not be asked to top up their mortgages.

As house prices stutter, recent homebuyers could find they owe more than their property is worth, leading to fears that banks may exercise their legal right to demand more money as collateral.

The proliferation of 95% to 100% mortgages has meant recent homebuyers have started out with little headroom in their loans and many could find that their home is worth less than they imagined.

The market downturn will increase the number of homeowners in that position.

But ASB, Westpac, ANZ National Bank, Kiwibank and Bank of New Zealand all say that as long as borrowers do not miss payments, or do not remortgage, they won't be getting surprise demands for top-up payments to repair damaged loan to value ratios (LVR) the loan amount as a proportion of the property value it is secured against.

ASB's Ian Parke said: "Where someone has bought a home for $400,000 and suddenly it's worth $380,000, as long as they keep up with their payments, fluctuations in value don't matter."

Westpac's Brian Hayr said: "The key thing for customer and the bank is serviceability. The LVR is only really important at the point of sale from a customer's perspective."

ANZ National Bank's Wayne Bezant said that what worries banks is the overall loan to value ratio on their whole property loan portfolio, not how an individual's equity position is tracking on their family home.

And on that score, said Bezant, banks are feeling comfortable as years of price rises have meant many of their borrowers have some very big equity buffers.

Bezant said: "In the last five to six years home values have gone up a heck of a lot so they are going to have to fall a hell of a lot to make a significant change in the overall LVR position, but it is a watching brief for everyone."

To some extent banks have insured a portion of their riskier loans using either lenders' mortgage insurance (premiums paid to an insurer such as PMI Group which insures BNZ home loans), or through low equity fees other banks that "self-insure" charge usually in the region of 0.2%-1.25% of the value of the loan, depending on the LVR.

The banks are making the same pledges to property investors, saying that as long as loans continue to be serviced, borrowers should not expect phone calls, although that assurance is being treated with some scepticism by investors.

Property author and investor Mike McCombie is warning borrowers to be aware of how lenders' attitudes can change in a falling market, and to prepare in case the day arrives when it does.

"In a buoyant market, lenders are much more forgiving of, for instance, missed payments or bounced automatic payments, and will ignore some issues," he said.

"However, when the market softens and falls, all that changes. The very same institutions will tighten up. All the fine print on your credit agreements now means something.

"Your unused revolving finance or line of credit can be changed in a heartbeat, even cancelled. Bank managers who may have had a great deal of discretion and independent lending approval ability can suddenly find their lending limits chopped."

He recommends all borrowers, whether investors or home owners, take the time to sit down and read their loan agreements.

"Not many people know it, but under the terms of many loans, lenders can ask for a review of your income/assets at any time," he said. "They can order an up-to-date market valuation on your property, or send their own valuer to do one."

Fellow author Peter Aranyi said property investors had experienced such calls in past property slumps, and it is now standard investing wisdom to spread borrowings around so as not to risk all on the whims of a single lender.

In How to Survive and Prosper in a Falling Property Market, McCombie also recommends borrowers put more effort into retiring personal debts, try to increase their incomes, and build an emergency buffer fund in the early stages of a property slump.

Homeowners who stray into or near to the negative equity line will find their options narrow, and that lenders' smiles may turn to frowns.

Those who try to get a top-up to their home loan, perhaps to consolidate consumer debt, or build an extension, will find that banks are reluctant to lend to them. Similarly, borrowers wanting to change banks will find their security closely scrutinised.

- © Fairfax NZ News