Affordability not always a level playing field

One of the most annoying things for mortgage adviser Brenda Murney of Vega is how banks assess affordability.

Murney, who spent a decade with the BNZ and has been an adviser for 12 years as well as being a property investor, says contractors, the self-employed and those on casual income get extra scrutiny when applying for a mortgage.

Outlining her views to a Bayleys Old vs New Property webinar, she says, “It often means these people have fewer choices on where they can obtain a mortgage.”

It doesn’t stop there, Murney says. “A bank can ask a borrower, for instance, to reduce their contributions to KiwiSaver if they are paying more than 3% into their retirement fund in order to meet the bank’s servicing requirements. That's something I find really annoying, asking people to reduce their savings to meet banks’ stress test rates.”

Banks’ stress test rates are normally about 2% higher than carded rates, so at the moment it is about 8.95%. “It is not just existing loans being worked out on this test rate but also new loans which are subject to bank ‘shading’. This is where a bank works out a percentage of a borrower’s income to use in their servicing calculation and makes a decision on how much they can afford to borrow.” 

Extra income such as rent from tenants or boarders, commission or bonuses all get a bank ‘shading’ applied, she says. “These percentages vary between the banks. Generally, loans get worked out on a 30-year term. That’s not to say a borrower keeps the loan for 30 years, of course, but some banks, not all banks, work it out on how many years are left until a borrower turns 65.

“So, that can make it even harder to get approval and it could make repayments huge and just not affordable. So with all the ‘shading’ differences at banks, it could be a yes from one or a no from another, and they're all looking at the exact same application.”

Keeping loans separate

High interest rates are keeping investors on the side lines along with myriad legislation changes, Murney says.

There is a 0.46% difference between ASB’s one-year fixed rate of 7.45% and Kiwibank’s 6.99%, the lowest available. “If an investor has $1 million in lending, that's a difference of $4,600 a year, and that's a huge amount. Over 30 years and that's a $138,000 difference.

“A lot of people say it's not the interest rate you should worry about, it's the loan structure. But to me it's actually both.”

Murney says it is good housekeeping for investors to use more than one bank if they are buying additional properties. She advises investors to keep their main home at a separate bank from any rental properties they have, or better still have a freehold residence they live in. 

“If a bank has to force a mortgage sale and all an investor’s properties are with the same bank, they could have their main home sold out from underneath them. By having rental property mortgages at a different bank an investor can’t be forced to sell their own home.” 

When it comes to selling a property, investors need to look carefully at whether they have the right structure to take the profit for themselves, she says.

Murney gives the example of clients who had their home and rental loans with one bank. “The retired couple owned two rentals and their own home. They sold their business and paid off their own home a few years ago, which left them with their rental loans in Hamilton and Auckland. They sold their Hamilton rental and made a $450,000 profit and planned to keep the Auckland property loan.

“The rent was more than covering the mortgage payments, but the bank said because they were retired, they didn’t qualify to keep the Auckland property loan in place and made them use $300,000 of the Hamilton profits to pay it back, leaving them with just $150,000. If they had used a different bank for the Hamilton rental property, only that loan would have been paid off and the other left.”

She says it’s a sober lesson in not giving one bank full control. “It's important investors go through and have a full financial review.” Typically a standard structure she looks at for investors is their main home property loan on principal and interest, and rental property loans on interest only at different banks. “The long term goal is to have no main home loan or for investors to use their home as deposits on other properties.”

Because of the recent higher interest rates, she suggests investors reduce their loans to a minimum so they have more surplus cash to help cover investment property loans or any shortfalls. “Loan repayments can always be increased when interest rates drop.

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