How Covid has changed lending
Today marks one year since New Zealand went into a nationwide lockdown thanks to Covid-19. Since then, so much has changed in our lives, our economy, and our ability to borrow money.
None of us could have predicted how the New Zealand economy and housing market would react to such a huge shakeup in the wake of multiple lockdowns and restrictions over the past year, and admittedly everything has faired much better than any of us could have expected. In particular, the housing market, which didn’t only defy initial predictions of a Covid induced slowdown, but continued to get hotter and hotter!
Combine a hot housing market with extremely low interest rates and a slightly less stable job market, and things have changed dramatically in the lending market. We have seen house prices soar and both the banks and government putting in place a number of new restrictions and rules to try and stay on top of things. Today we take a look at how lending has changed in the past year, and why getting the right advice has become more crucial than ever.
BANKS TIGHTEN UP
One of the things that has the most impact, is that banks have become much more risk-adverse, and as a result have tightened up their lending criteria.
Banks have made huge changes based on how they assess income. Before Covid-19, if you were on a salary, things were pretty simple - provide three months of payslips and you were good to go. Now one big factor the banks are taking into account is also how likely you are to be in employment in the future and that you will be able to service and uphold the loan, despite whatever might happen in the future.
Anyone who gains their income from bonuses or commissions, also has to work extra hard to prove that the amount they are earning is likely to continue to that standard in the future.
Rental income is also closely inspected, with many banks having differing rules around how this income is treated. Some banks include rental income from flatmates, while others only include a percentage of the total income received.
The differences between lenders is now significant so its pays to do your homework carefully, or use a mortgage adviser to unpick the best way forward for your particular circumstance.
LVR’S CAME BACK INTO PLAY
At the start of the year, the RBNZ announced that the LVR (Loan to Value) restrictions would come back into play, to try and take some of the pressure off the housing market from investors. Before this could even become a rule, many banks jumped the gun to make changes to any investors wanting to borrow. A 30% LVR is currently required for investors, with this going to 40% come May. Most banks are already requiring the 40%.
NON-BANK LENDERS BECAME MORE POPULAR
Non-bank lenders have reported significant rises in lending since Covid. Since larger banks have become more risk adverse in their lending and tightened criteria, many borrowers are finding that non-bank lenders offer a more suitable lending option for them. Non-bank lenders are also not required to uphold RBNZ restrictions, so are an attractive option with those less than the required LVR rates. Many non-bank lenders now have rather attractive interest rates, not that much different to regular banks.
INTEREST RATES & TEST RATES
Interest rates plummeted post-Covid, meaning money was cheap to get. However banks still maintained a certain level of cautiousness, with test rates remaining much higher, ranging from 4.09% to 6.45%, allowing banks to ensure that borrowers could still service their mortgage even if things were to change. With everything still remaining rather unpredictable, this is a buffer not only for the banks, but borrowers too.
THE GOVERNMENT STEPS IN
As a result of hot house prices, the government has stepped in with a significant package of changes, putting in restrictions to try and cool things down a little. Investors have been hit hard especially, with things being loosened off a little for first home buyers - including the raising of income caps and house price caps for some regions. It will take some time to unpick all the implications of the changes, but first home buyers were left feeling a little underwhelmed, investors picked on and no one is quite sure how it will unravel with talk of rents rising at least in the short term as there is still a shortage of supply.