Housing affordability has been a major issue in New Zealand for quite some time but we have been making strides in improving and turning things around.
The good news is that there has been improvement in most parts of the country as the government and the Reserve Bank are making special efforts to improve the situation. As a prospective home buyer, you need to focus on two major aspects - house prices and home loans. Here you will find helpful information and advice on getting approved for the ideal loan.
The current home loan situation in New Zealand
At present, the interest rates on home loans in New Zealand are going up as the Reserve Bank recently increased the rate to 3.5%. At the same time, property prices are falling. In June 2014, the median price decreased by 0.6%. So far, the drop in home prices offsets the increase in interest rates and housing is therefore becoming more affordable. This trend is expected to remain given the macroeconomic measures which have been adopted for improving the affordability of housing.
There are positive developments in the market for home loans as well. In order to ensure that their loans remain attractive despite the upward moving interest rates, lenders offer special deals which are quite favourable to borrowers. Some of the most beneficial deals include loans with low fixed interest rate.
Home loan affordability
You can afford to take out a home loan and purchase a house only if you have sufficient income for making the regular loan payments. The lender will take into account your gross and net income and your monthly spending to determine whether you will be able to afford a loan. Usually, you will get approved for the finance amount which you require as long as the regular payment is between 30% and 40% of your gross income for the respective period.
Income to debt ratio explained
In general, the lower the payment-to-income ratio is the higher your chances of mortgage approval are. Applicants with a ratio below 30% are considered to have the best chances of getting approved. There are lenders who calculate a minimum surplus allowance also known as uncommitted monthly income. This is the income which you must have left after paying all fixed costs and living expenses. The greater this allowance is the better.
The best strategy for increasing your chances of home loan approval is to repay as much debt as possible before you apply for a home loan. You should try to clear the outstanding balances on most personal loans and credit cards which you have. This will leave you with higher disposable income and can have a positive impact on your credit rating as well.
Home loan deposit required in New Zealand
Most conventional home loans in New Zealand require a deposit of 20% of the value of the property. It may be possible to negotiate a smaller deposit, but you must have exceptionally good credit history and excellent relationship with the lender. First home buyers can take advantage of the Welcome Home Loans which are backed by Housing New Zealand Corporation and are available from lenders participating in the scheme. These loans require only a 10% deposit. First home buyers can also take advantage of KiwiSaver deposit withdrawal and KiwiSaver deposit subsidy for coming up with the required sum. If you have bad credit, you may have to offer a higher deposit, perhaps of 30%, in order to get approved.
Required credit rating for a home loan
When you apply for a home loan, the lender will have the right to check your credit record to see if you have past defaults. They can also check your current payments. In order to get higher chances of approval, you need to request a copy of your report and have any errors fixed. You should try to clear past debt as well. Additionally, you have to ensure that you will pay all of your bills timely and in full. If you have past defaults which cannot be cleared, you should be able to explain them to the lender.
Employment income stability
You will have high chances of getting approved for a home loan if you have been earning a steady employment income over the past 2 years. If you have been working for the same employer during this time, this will give your application a further boost.
Home loans for self-employed in New Zealand
Self-employed home buyers do not enjoy the same income stability as employed workers. There are a lot of factors which determine this income including the general economic situation in the country. Given the fluctuating income of self-employed borrowers, lenders are more hesitant to approve them.
Still, this does not mean that you do not stand a chance if you are self-employed. As long as you are able to meet somewhat higher requirements, you can qualify for credit. Most lenders require you to present financial statements showing your income for the past two or three years. They may want proof that you have enough money in your bank account to make mortgage payments for three or more months. Another way in which you can support your application is to invest in a security with low risk which produces a steady monthly income.
Use all of these techniques for increasing your chances of home loan approval.