First home buyers in New Zealand face more challenges than ever when it comes to buying a first home. House prices remain largely unaffordable for many, while higher interest rates and the high cost of living further impacts housing affordability, leaving many first home buyers with a much smaller budget. If you’re considering applying for a mortgage in 2023, here is some insight that could help you get home loan ready.

Interest rates and inflation

Rising interest rates and higher inflation means lenders are taking more care than ever to ensure they do not write unaffordable mortgages that set homeowners up for failure. Where previously lenders may have considered a loan application at the very top of a homeowner’s budget, mortgage serviceability test rates – the interest rates that lenders use to test loan applications – are being pushed ever higher. 

What to do?

• To minimize the chances of your mortgage application getting knocked back or delayed, it’s vital prospective home buyers consider every dollar spent.
• Be honest and ready to disclose everything that involves your finances, including your income, savings, investments, expenses, existing debts and any other financial commitments.
• Keep squirrelling away any savings for your deposit, and if possible save at least 20 per cent of the purchase price of a property to avoid having to pay Lenders Mortgage Insurance. The bigger your deposit, the less you have to borrow, so the lower the risk you are to a lender.

Debt-to-income

It’s looking more likely that a debt-to-income (DTI) limiting tool could be introduced by the Reserve Bank of New Zealand (RBNZ) from as early as March 2024 for lenders to use to assess borrowers. Debt-to-income is calculated using a simple formula of debt divided by income expressed as a percentage. While DTI has not yet been introduced, RBNZ may consider using this tool to support financial stability in conjunction with loan-to-value (LVR) restrictions.

What to do?

• Critically assess expenses prior to applying for a home loan and change any spending habits that may be viewed by lenders in a negative light or that could hinder your chances of being approved for a loan. Ideally, do this for at least 3 months before applying for a mortgage.
• Reduce your credit card limit and stick to just one credit card with a reasonable limit. The higher your limit, the less money lenders can responsibly lend to you.
• Job stability is important to lenders so ideally you want to be in the same job for at least six months, or if you have recently changed jobs, in a previous similar role for a minimum of two years. 

Environmental concerns

Climate change poses a real threat to financial stability, with risks such as droughts, flooding and rising sea levels potentially threatening both lenders and insurers with financial risk. Climate change concerns that leave lenders more vulnerable to economic downturns could see lenders reducing lending to households and businesses in parts of New Zealand at greater risk of extreme weather events as a result of the climate crisis.

What to do?

• Be aware of the risk that climate change poses to mortgage lending and insurance premiums, and factor this in to your home buying decision when choosing a property. 

Buy now pay later (BNPL)

The growth of buy now pay later (BNPL) schemes in New Zealand has Government concerned that low income earners could fall into debt traps because of the ease with which borrowers can access this type of lending.

Recently, Government announced it would be following through with plans to help protect vulnerable New Zealanders with more stringent affordability checks on certain BNPL loans. Changes to these regulations are likely to have an impact on lending requirements when it comes to borrowers with BNPL debt.

What to do?

• Cut back – or avoid – Afterpay or other BNPL purchases as these could affect your chances of being approved for a loan. Work on reducing this debt by paying it down as soon as you can.
• To prove to lenders that you have a clean and stable financial track record, ensure your credit score portrays you as the ideal borrower. Repay your debt on time and in full and avoid missing repayments or making late repayments. 

Get more first home buyer help

Mortgage Express branded mortgage advisers work with you to:

• ASSESS your needs and unique financial position, and recommend loan options and strategies.
• EXPLAIN the entire process from start (Application) to finish (Settlement).
• ASSIST with all paperwork required. Before submitting your application, we will look at your living expenses in the same way lenders’ credit assessors would and ask you about the spending habits which could decrease your chances of getting a loan approved.
• COLLABORATE with all those involved in purchasing your home such as solicitors, real estates and lenders.
• CONDUCT regular reviews after settlement, making sure you are supported and still enjoying the most competitive deal for your situation. 

Get in touch with a Mortgage Express branded mortgage adviser for more advice about getting home loan ready in 2023.