Banks may decide low-capital loans to first-time homebuyers just aren’t worth the risk

By on June 28, 2022 0

Home prices may be falling and mortgage interest rates may be rising, but the amount first-time home buyers are paying to secure their own home remains at or near record highs.

According to the Real Estate Institute of NZ, the national bottom quartile selling price peaked at $670,000 in November last year and has since declined by $42,000, falling back to $628,000 in May.

Over the same period, estimates, based on Reserve Bank lending figures, that the average amount paid for homes by first-time home buyers increased by $11,000, from $705,000 in November last year to $716,000 in May.

However, the numbers suggest that the recent increase in the amount paid by first-time home buyers was entirely due to these first-time home buyers purchasing a home with a low down payment of less than 20%, and hence a high loan to value ratio (LVR) loan.

Between November of last year and May of this year, the estimated average amount paid by first-time home buyers with a minimum 20% down payment increased from $702,000 to $697,000, while the estimated average amount paid by first-time home buyers with a down payment of less than 20% increased from $709,000 to $761,000.

First-time home buyers with a low deposit not only pay higher prices on average than their counterparts with a full 20% deposit, but they also borrow significantly more.

The average mortgage approved in May for first-time home buyers with less than 20% deposit was $127,000 higher than the average mortgage approved for first-time home buyers with a minimum 20% deposit .

And low deposit buyers will pay the teeth for this privilege. Banks generally charge additional fees and higher interest rates for low principal loans, to reflect the higher level of risk involved.

Thus, borrowers with a low deposit will almost certainly face significantly higher mortgage payments than their counterparts with a full deposit, and since they would also have less equity in their home, they would have less room to restructure their loan if necessary. they encountered unforeseen financial difficulties.

The latest Reserve Bank figures show that although the proportion of new mortgages approved for first-time home buyers with less than 20% down payment is lower than it was a year ago, it has grown rapidly in recent months.

In November last year, when house prices peaked, low-capital loans accounted for 34% of first-time homebuyer mortgage approvals and that figure had fallen to 16% by March this year. year, but had risen to 30% in May.

That could explain why banks appear to be limiting weak equity lending, with the country’s two largest mortgage lenders, ANZ and ASB, both this week. announcing a pause on new low-capital mortgages.

Although small-capital loans represent a relatively small proportion of total mortgage loans, at a time when house prices are falling and interest rates are rising, much of the risk banks face is likely to increase. be concentrated in this relatively small number of low capital loans. borrowers.

Banks may simply decide that the risks associated with these loans are currently not worth the additional business they could bring.