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Banks Archives - Mortgage Advisers - Mortgage Lab

It happens to almost everyone eventually.  You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you.  Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because, according to their calculations, you don’t have enough income.

Typically, the three main questions a bank will ask is : 

The Income Hurdle

All Mortgage Lab Advisers are taught to answer two income questions:

In other words, even if the bank says yes, can the Adviser sleep at night knowing this mortgage is in place?

Fortunately, these days, the answer is very rarely yes to the first question and no to the second. This is because the banks have some very conservative requirements on income for mortgages. 

To understand why a bank might say no to you purchasing further investment properties, you need to understand how the banks calculate how much they think you can afford. 

Anticipating future interest rates

The banks calculate the amount of mortgage you can afford at, or around, the mid 7% interest rate. They are (obviously) aware that interest rates are currently much lower than that, however they need to know you can afford interest rates at a higher level.  

Some argue that rates have been higher than that in the past (much higher if you were around in the 80’s).  Shouldn’t they be calculating the mortgage affordability at 11%?  The theory is, if interest rates start to head north again, you’ll have a few years notice to remedy the situation (ie; sell the property) before it goes significantly above the 7%/8% mark.

Rental income

Every Mortgage Adviser knows, the banks perform “shading” on all rental income received for investment properties. Typically this is 25% meaning if you earn $20,000 of rental income per annum, they will count it as $15,000 actual income. 

Doesn’t seem fair, does it? The first thing clients say when they hear this is there’s no way an investment property is going to be vacant for 3 months (25%) every year. If it is, it’s a terrible rental property!

But this shading includes additional costs such as repairs and maintenance, rental management fees, and sometimes rates and insurance. Given that, 25% shading of income is actually about right. 

Credit Cards

As we have seen in previous blogs, Credit Cards can have a major affect on the amount you can borrow. The banks must assume you’re going to max out the cards so often take the limit, not the actual amount you owe when calculating your income. 

Number of cars

One bank in particular adds a cost of ~$500 per month per car that you own. This can add up, especially once you own 3 or more cars and can significantly reduce how much you can borrow. 

What to do if the bank says no because of income?

So you’ve applied to the bank and been told no because, according to the bank, you can’t afford it.  Here are some things you might want to investigate:

Reduce unused Credit Card limits

As we’ve seen, these are just eating away your “useable income” at the bank. If you’re not using the limits reduce them and get confirmation letters from the companies to show the bank.

Get a rental appraisal on the new property

Real Estate Agents and Property Managers will supply you with a rental assessment that shows what you’re likely to rent this property for.  It might be more than you think.

(Pro tip: if the assessed rental is a range – eg; $300-$330 – the bank will use the lower of the range, in this case $300)

Consider getting Boarders into your home

Do you have a spare bedroom?  Get a Boarder (otherwise known as a flatmate) in.  The banks will usually allow up to $150 per week of boarder income which raises your annual income by $7,500.  The banks usually allow a maximum of 2 Boarders so don’t go overboard with this!

Remove your Student Loan

Only have a couple of hundred dollars left on your Student Loan?  It may be worth paying this off beforehand.  As long as, by paying it, you don’t end up using too much of your deposit (and creating a “Equity Hurdle”, you will free up a significant amount of income by removing the Student Loan payment from your payslip.

Pay off any HPs that are almost finished

Much like Student Loans, the banks have to take any Hire Purchase payments off your income; even if you only have a few payments left.  If you only have a small amount left and it’s not going to affect your deposit, get rid of them!

Increase rental on existing rental properties

Are you under-renting your existing rental properties?  A $20 per week rental increase is an additional $1,000 per annum.  This can make a surprising difference to how much mortgage you can borrow.

Sell a car

As we saw above, at least one bank takes the number of cars that you own into account.  If you have an excess amount of cars, consider selling one.  This may also help your deposit!

Ask the boss for a raise

Most clients think we’re joking when we suggest this but a $2 per hour raise is the equivalent of an additional $4,000 per annum increase in income assuming a 40 hour per week job (it’s best not to point that out to your boss though!).  This can help you get to where you need to be.  It’s worth the question!

Time to reassess

If you have tried every option above, at this point it is time to reassess.  Is the bank correct?  Is it possible that you have completed your budget incorrectly and you can’t afford the new mortgage?  If so, that’s ok.  Start to adjust the price level you’re looking for down and see what else is available in the market.  If you are still sure you can afford the mortgage you have one more option.

Consider using non-bank lenders

There are finance companies that will lend on a purely “asset only” basis.  Typically they lend up to a maximum of 70% of the property and don’t ask any questions about your income.  They assume that you have done your homework and can afford the mortgage.

What to expect from non-bank lenders

Firstly, the interest rate will be higher than the banks.  The companies are taking a big risk by not assessing income so they need to be compensated.  Expect interest rates to ranges from 6.5% to 14% depending on the lever of risk that you bring (bad credit, LVR etc).

There may also be fees, some annual, some one-off.  They can typically range from 2-3% including the broker fee (we aren’t paid commission by these companies so we have to charge a fee).

Finally, have an exit plan.  The non-bank lenders don’t typically want to be your mortgage provider for more than 2-3 years.  They want to understand what you’re going to do with the property that will enable them to be removed as lender.  In this article, we’ve been looking at a shortage of income.  Perhaps you’re going to renovate the property so it brings in more income (at which point you will refinance back to the banks).  Perhaps you’re expecting a major pay rise in the next few months, or one of you is on maternity leave and will be returning to work.  These are all good reasons to pay a higher interest rate for a short amount of time to secure a good property.

Bringing in partners is not a great option

This is going to be hard for some people to hear but bringing in your friends as “co-borrowers” is not the bank’s favourite answer to an income shortage.  It sounds, on the face of it, like a great idea.  Bob is a mate and has spare income; why not bring him on board?  The problem is, friendships are tenuous and can fall apart.  And nothing puts a strain on friendship like money.  

What happens when Bob want his income to purchase another property?  Will you be able to raise the finance to pay him out.  If you can’t do it now, it seems unlikely.

The banks refer to this as a “borrower of convenience”.  You don’t have enough income so you grab a friend in from off the street.  These days, the banks simply decline these applications.

You have options

There are many ways to fix an income shortfall.  The key is to:

It happens to almost everyone eventually.  You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you.  Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because you don’t have enough equity in your existing property.

Typically, the three main questions a bank will ask is : 

The Equity Hurdle

The equity hurdle is probably the easiest to figure out.  This is uniform across all the main banks so you know you’re on even playing ground.  The current maximum LVR any main bank can lend is: 80% on Owner-Occupied property and 65% on existing investment properties or 80% on new build investment properties.

(Note: you can borrow higher on Owner Occupied properties if it is your first home.  Once you start to buy investment properties, the banks will typically lend to an 80% maximum).

How have they valued your current properties?

If you have been declined because you don’t have enough equity, the first thing to find out is how have they estimated the value of your existing houses.  Is it by Council Valuation?  Is it by Desktop Valuation?  If it is, is that a true valuation of your property?  If you have done significant amounts of work to your property, it’s likely the value of your existing properties is higher and it’s time to think about ordering a Register Valuation.

Registered Valuations for existing properties

When you are going to give the banks a Registered Valuation, it is important to order it through the bank system (ask your Adviser which system to use).  This is because, in years gone by, clients have chosen “more liberal” valuers or tried to influence the price.  These ordering systems confirm independence to the bank.  The downside?  You may end up with a very conservative valuer which may value your property lower than others would.  This is the unfortunate risk and the only solution is to reorder another valuation if you are unhappy with the first number.

Consider new-build properties

As mentioned above, main banks can lend up to 65% on existing properties and 80% on new-build properties.  You shouldn’t underestimate what a difference this makes if you are facing the Equity Hurdle.  Consider an example where you have a $500k owner-occupied home that has a $100k mortgage:

Obviously this example is subject to you being able to afford these amounts.  It is simply meant to show you how much more you can purchase buying new versus existing.

What constitutes a new-build?

To be a new-build property, the Code of Compliance must have been issued within 6 months of you purchasing the property.  You must also be purchasing directly from the Developer.

Go outside the banks

If you really want to buy an existing property but are being limited by the 65% LVR rule, there is another option.  The main banks are restricted to 65% maximum LVR but non-banks aren’t?  They can typically lend up to 80% on investment properties and there are 2 or 3 companies that will happily do this.  Their interest rates can be 1-2% higher than the main banks however if you have found a good opportunity, this may be a small price to pay.

A classic example of this might be if you have found an existing property that needs some TLC or repairs.  You calculate that with $50,000 of work, you can increase the value by $100,000.  The banks say no because you don’t have enough equity but you can get the mortgage from a non-bank lender at 2% higher.  Let’s say this comes to an additional $7,000 in interest per year).  Is it worth paying an additional $7,000 in interest to make $50,000 in profit (or $43,000 after additional interest)?

The goal may well be to increase the value of the house and refinance it back to the main banks once it meets the 65% LVR criteria – maybe in a year or two.

Get family help

It is very common with our first home buyers and increasingly so with our first investment buyers to receive help from family.  Receiving a gift from parents does not overly complicate the application to the bank if it is documented correctly.  Ideally, the money would be a long-term gift – repayable upon the sale of the property.  If it is a loan that requires regular payments, this may simply shift your hurdle from Equity Hurdle to an Income Hurdle.  If you are unsure how help from parents will affect your application, ask your Adviser to run the different scenarios.

You have options

For a problem that seems so concrete and immoveable, you actually have a lot of options.  In summary:

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time!

We are holding a Questions and Answers session with our panel of experts. There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house-buying process.

Doors open at 6pm. We will get started at 6:15pm. Don’t worry! We have plenty of parking available.

Address:

Century 21
12 Silverdale Street
Silverdale, Auckland

Powered by Eventbrite

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

Harcourts
Level 2
3/2 Te Pumanawa Square, Northwest Shopping Centre
Massey, Auckland

Powered by Eventbrite

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

Welcome to our First Home Buyers Questions and Answers session.

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time! Our Q&A session means you get answers to all the questions you have.

Our Panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house buying process.

Doors open at 6pm and we will get questions started at 6:15pm. Parking is available in all Financial Design carparks outside. Come along early to grab some nibbles.

Powered by Eventbrite

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

$70 worth of items with your ticket

Early-bird tickets are available in August for $29.95.  For less than $30 you’ll receive:

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

SubUrban
Level 1, 2 Johnsonville Road
Johnsonville, Wellington

Doors open at 6pm and we will get questions started at 6:15pm.  Plenty of parking available.  Come along early to grab some nibbles.

*Note: to receive your free E-Valuer report and book, you must attend the seminar.

Powered by Eventbrite

 

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

In recent years, the Reserve Bank of New Zealand has implemented a host of rules on the banks, particularly around mortgages.  These rules have several purposes.

Some of them, like the LVR restrictions, are to stop the bubble mania of 2008 from happening again.  The days of lending 100% (or more) on a property are gone and not returning any time soon.

Some of the new rules, like the Responsible Lending Code, should just always have been there.  They require a lender to be able to hand-on-heart say that they were acting responsibly in granting a loan to the client.  Banks are calculating a mortgage at 7.5% to allow for future interest rate rises.  They also assume a 25% vacancy on rental properties which allows for some vacancies and other costs like repairs and maintenance.

These changes most often come up when a mortgage application is in, what I like to call, the “grey zone”.  The clients is just on the edge of what the bank are comfortable with.  Some examples of these grey zone applications are:

At first glance, none of these criteria are dealbreakers but the banks can only take on a certain number of these loans.  They also don’t want to be known for taking on grey zone loans.  If that happens, they end up holding a majority of those loans in the country which is obviously not preferred.

How do the banks decide who to give “grey zone” lending to?

Ask any Mortgage Adviser at the moment how to get a difficult application through the banks, they will answer the same way.  A bank is more willing to lend to an existing customer than bring on a new customer.  They have a lot more information on an existing customer and they are much more able to make informed decisions.

I have accounts with lots of banks.  What constitutes an existing bank customer?

Banks count themselves as “your main bank” if your salary goes into one of their accounts.  I know most of you have just seen a workaround but unfortunately this needs to have been happening for at least 3 months (sometimes 6 months).  Don’t think you can change your salary payment tonight and be an existing client tomorrow.

Couples should use separate banks

It’s therefore a good strategy to have couples, who are looking to buy in the future, put their salary into different banks.  You can still have a joint account but my suggestion is that you put your salaries into completely different banks and then transfer the money into the one account.  Maybe put your personal spending through the different banks to really show that you are an existing customer.

With this strategy, you’ve now got 2 banks who think of you as an existing customer and are likely to be a little more lenient on you if you have to push the limits of their lending policy.  A Mortgage Adviser will still be able to tell you which bank is better to approach first.  Either way, with this strategy, you’ve doubled your odds of a successful outcome.

 

What is the OCR?

The OCR is an interest rate set by the Reserve Bank of New Zealand which defines the wholesale price of borrowed money. This directly affects the commercial banks, determining the rates they offer their customers. So it affects the rates banks charge for borrowing (mortgages, loans, credit cards) and what they will pay customers for saving (term deposits, savings accounts). The Reserve Bank reviews the OCR eight times a year.   Monetary Policy Statements are issued with the OCR on four of those occasions. Unscheduled adjustments to the OCR may occur at other times in response to unexpected or sudden developments, but to date this has occurred only once, following the 11 September 2001 attacks on the World Trade Centre in New York.

What the OCR does

The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. An OCR is a fairly conventional tool by international standards. In the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. Such mechanisms were more indirect, more difficult to understand, and less conventional.

How the OCR works

Most registered banks hold settlement accounts at the Reserve Bank, which are used to settle obligations with each other at the end of the day. For example, if you write out a cheque or make an EFTPOS payment, the money is paid by your bank to the bank of the recipient. Many hundreds of thousands of such transactions are made every day. The Bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.

 

The graph shows that the path of 90–day bank bill rates closely follows the OCR.

As a result, market interest rates are generally held around the Reserve Bank’s OCR level. The practical result, over time, is that when market interest rates increase, people are inclined to spend less on goods and services. This is because their savings get a higher rate of interest and there is an incentive to save; and conversely, people with mortgages and other loans may experience higher interest payments.

When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce. Although the OCR influences New Zealand’s market interest rates, it is not the only factor doing so. Market interest rates – particularly for longer terms – are also affected by the interest rates prevailing offshore. New Zealand financial institutions are often net borrowers in overseas financial markets. Movements in overseas rates can lead to changes in interest rates even if the OCR has not changed. (source: taken from RBNZ website)

How does the OCR actually affect interest rates?

The OCR was introduced in March 1999 and is reviewed seven times a year by the Reserve Bank. The OCR is actually the interest rate for overnight transactions between banks. Among other things, the Reserve Bank acts as the central bank for most registered banks in New Zealand, who hold settlement accounts at the Reserve Bank.

To explain, if you write out a cheque or make an EFT-POS payment, the money is taken from your bank and put into the bank of the recipient. This causes the money within your bank and every other bank to go up and down each day according to what their customers are spending or depositing.  Depending on daily transactions, individual banks can end the day in credit or debit.

Much like an overdraft account, the Reserve Bank covers the ups and downs by either paying or charging interest to banks depending on whether they are in credit or debit. Banks can borrow money from the Reserve Bank at a rate 0.25 percent higher than the OCR, or lend money to it at a rate 0.25 percent lower than the OCR.

Short term interest rates are therefore influenced by the OCR because banks are unlikely to lend money to people for rates less than they could receive from the Reserve Bank, or to borrow at rates higher than they would pay the Reserve Bank.

By affecting overnight rates, the Reserve Bank has a strong influence on short-term interest rates such as the 90 day bill rate and floating mortgage rates.

However the impact isn’t direct and may not be immediate. While overnight interest rates will respond quickly, longer-term interest rates may not. Some overseas investors will respond quickly to changing interest rates, but most consumers and businesses won’t.  Why does the Reserve Bank change interest rate?

As the OCR affects short term interest rates, if a majority of mortgages are on long term fixed rates, then the OCR will have little effect on mortgage rates. (Source: New Zealand Property Investors’ Federation website)

Why does the Reserve Bank change interest rate?

The Reserve Bank is responsible for implementing monetary policy in New Zealand. It operates under the Reserve Bank of NZ Act 1989 which states that the Bank must maintain price stability. The Bank also operates under the Policy Targets Agreement (PTA) that it signs with Government.

The current PTA, signed in September 2012, defines price stability as annual increases in the Consumers’ Price Index (CPI) of between 1 and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint. The CPI is a list of 690 goods and services, whose prices are monitored by Statistics NZ to see if they are going up or down.

The Reserve Bank monitors the NZ economy and uses this huge bank of data to make predictions on where it sees the CPI and hence inflation is tracking. If the Reserve Bank believes that inflation is going to go beyond the range it has been instructed to keep within, it will use the OCR in an attempt to keep inflation within the range.

As interest rates rise, people spend less, either because there is an increased incentive to save rather than spend or people with mortgages and other loans have less to spend. When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce.

In addition to having an influence on interest rates, unfortunately the OCR has an effect on other economic factors. As interest rates increase, NZ becomes more attractive to overseas depositors, who buy NZ dollars to access the higher interest rates. This increased demand for the NZ dollar increases its value compared to other currencies which makes NZ products more expensive in overseas markets.

One reason the Reserve Bank introduced restrictions on Loan to Value Ratios (LVR) was to influence inflation. The theory is that if people are required to have higher deposits when buying property, this will encourage them to save more to get a higher deposit. This reduces spending as well as the risk of over borrowing, while not having an effect on the exchange rate.

As with anything the Reserve Bank does there will be winners and losers as a result of these restrictions. This then begs the question, have we got our inflation targets set correctly in the first place?

Mainstream banks have started to respond to the LVR (Loan to Value Ratio) restrictions following the Reserve Bank’s announcement on November 29th 2017.

LVR on Investment properties

Most major banks have indicated that, as of 1st January 2018, they will begin lending up to 65% on investment properties (up from 60% this year).

Example:

Let’s say a couple have their own house and want to buy an investment property, both valued at $500,000.  Previously they could borrow up to 80% on their own home ($400,000) and 60% on the new investment property ($300,000).  In other words, the total borrowing on their $1 million property portfolio would be $700,000.

As of the 1st January 2018, the same couple will be able to borrow $400,000 on their own home as before.  But now they will be able to borrow $325,000 (65% LVR) for a total borrowing of $725,000.

Is this enough?

With the new rules, it is slightly easier to borrow to purchase an investment property.  It won’t open the flood gates but buyers who are currently just short of being able to buy may find themselves back in the market.  I think this is exactly the outcome that the Reserve Bank are hoping for.

Low (high LVR) Deposit Buyers

There has been some confusion around this change of policy.  Currently, 10% of any bank’s new owner-occupied mortgages can be lent to clients with less than 20% deposit.  In other words, those with higher than 80% LVR.

The LVR mark is still 80% however the banks can now lend up to 15% of their new owner-occupied mortgages to low deposit buyers.

And banks are already indicating how this is going to change.  One bank, who has recently declined almost all mortgages over 85%, has indicated that they are now more prepared to look at up to 90% again.

Is this enough?

A mere 5% increase in available lending doesn’t sound like much.  But the question has to be asked, what percentage of lending goes to low deposit buyers if there are no restrictions?  Of course, it’s not 100%.  A large portion of mortgages will always to be low LVR owners simply due to the nature of capital growth.

Given this, I think the change to the available lending is going to more significant than it initially sounds.  And the great news is, this is going to affect first home buyers the most (for the better).  This will allow those with a deposit hurdle more of a chance to get into the home they want.

Summary

Some exciting changes are happening to the property market.  The 2 main changes are:

 

 

 

A common phrase in mortgage world is the “one bank trap”. It’s when you have all your lending with one bank which gives the policy makers at the bank all the power and lowers your negotiating power. If the bank’s policy changes, all your investment eggs are in the same basket.

But if you spread yourself too thin, you create a different type of nightmare.

Let’s use Joe Bloggs as an example. Let’s say he has 5 investment properties with $1.5m of mortgages. For this simple example, let’s say he has no personal debt. How should he spread his mortgages?

The One Bank Trap theory says that if all his debt is with one bank he’s exposed to their rates and their rules. He also can’t play the other banks off against each other.

But lets look at the other extreme. Spreading his 5 properties across 5 banks means he could give each bank $300k debt each (assuming all properties are equal value). But this means each bank is hardly making any money on their slice of the mortgage. He also now has 5 internet logins and a large stack of eftpos cards in his wallet.

My general rule of thumb is to give a bank around $1m of lending and then look around for another bank. In this case he might give the first bank 3 properties and $900k of lending. This would certainly put him in the “preferred category” and would also mean he is likely to get the best rates.

He can then diversify the rest of his borrowing to a second bank. He might give them $600k and using the first bank’s rates to negotiate the second bank lower.

In summary, become a premium client with one bank by borrowing more than, or close to, $1m. Once you’re there, begin to diversify. Don’t get too hung up on the One Bank Trap before you need to.