Low deposits won’t lead to mortgage free for all

5% deposits for first home buyers – it’s one of the centrepieces of the KiwiBuild “reset” – but advisers are asking whether it will actually make the sort of difference hoped for.

The scrapping of the goal to build 100,000 new homes over 10 years is the headline grabber of the reset, but it is the changes around finance for home ownership which look to have the more tangible impact.

Under the “reset” the Government has reduced the deposit required for what was the KiwiSaver HomeStart loan (now the First Home Grant) to 5% from 10%.

Many commentators, such as REINZ chief executive Bindi Norwell, have welcomed the move, saying it will significantly help a number of first home buyers.

Norwell says that saving for that initial deposit is often the biggest hurdle to getting on the property ladder.

“This change means that Queenstown-Lakes is now the only area in the country where the deposit required to purchase a median priced home would be in excess of $50,000.”

However, Westpac is the only one of the big four banks to be a part of the Welcome Home scheme – although KiwiBank and several smaller lenders are also in the scheme.

This means there could be a limit on how much mortgage lending actually gets done with a 5% deposit.

That’s a theory that NZ Financial Services Group’s Bruce Patten agrees with. He says the big question around the policy is whether the banks would all be on board with it.

“For most of them, it would put them into conflict with the Reserve Bank’s LVR requirements. If the banks don’t want to lend with a 5% deposit, they won’t.”

This is one of the reasons that Patten doesn’t believe the lower deposit allowance could over-extend lots of people and, potentially, get them into trouble.

Some commentators have suggested that allowing deposits at the 5% level could be dangerous for households – and the wider economy – if unemployment and interest rates start rising again.

But Patten says that banks will have more stringent servicing criteria for people borrowing with low deposits, like 5%.

“If the banks are doing the right checks on a borrower’s ability to service the mortgage then the borrower should be okay whether they are getting a 5% or a 10% deposit.”

Looking back to the GFC for precedent was not sensible because, in those days, many lenders were happy to lend to anyone with a pulse, Patten adds.

“That has changed. Banks, and non-bank lenders, are rigorous in checking out borrowers to ensure their serviceability. As long as they maintain that level of scrutiny there shouldn’t be a problem.”

For Squirrel Mortgages’ John Bolton, the reduction of the deposit is almost irrelevant – although he says it will be fantastic for those people who can utilise it effectively.

That’s because he too says getting mortgages is all about the serviceability equations.

“Any debate about the lower deposit pushing people into debt they can’t afford is a bit stupid because the servicing calculations banks apply are not changing and they are what determine loans.

“So it won’t help as many borrowers as it might appear and also a lot of people who might get into trouble won’t because they still won’t be able to get past the banks’ servicing criteria.”

For these reasons, Bolton doesn’t believe the 5% deposit will make much difference in the general scheme of things.

“I would have preferred to have seen some movement in the house price cap points, especially in Auckland. They are just too low and increasing them would open the market up a bit for more first home buyers.”

Meanwhile, Kiwibank has announced that if customers meet “first home buyer” eligibility criteria and their affordability requirements it will provide them with access to a 5% deposit from October 1, 2019.

However, the bank’s general manager of borrowing and investments, Chris Greig, says that as a responsible lender they will ensure that customers are able to afford the proposed lending despite lower deposit requirements.

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