Overcoming Challenges With Current Mortgage Rates & Lender Rules

First home buyers and property investors struggle to obtain mortgage lending  

New Zealand investors and first home buyers are laying low in the current property market.

Meanwhile, those with existing mortgages have a strong preference for fixing their loan for two years and there is a strong sense that lenders (including banks) have further tightened their lending rules.

Rising interest rates have prompted many buyers to retreat from the market for several months because many no longer qualify for a home loan.

This is all according to the latest mortgage adviser survey.

But, more banks are willing to lend outside of rising test rates, with lenders loosening credit criteria and more actively welcoming new business.

Economist Tony Alexander, who helps collate and interpret the survey, said a net proportion of respondents said fewer first home buyers were reportedly coming forward for advice for the first time since July 2022.

Alexander went on to say that fewer investors were coming forward for assistance with their financing requirements. “Interest from investors in residential property buying remains as bad as it has been since early 2021 when the tax rules changed,” Alexander said.

On 27 March 2021, a surprising law was introduced to cap property investors claiming 100% of their mortgage interest charges. For investment properties purchased after March 27, 2021, owners could only claim 75% of mortgage interest charges before the percentage drops to 50% on March 31, 2023. There are some exceptions to this: such as investors in new housing stock (“new builds”).

Interest Rates, Where Next?

Most pundits see interest rates declining over 2023, which will mean buyers will step forward, and the property market will again lift. However, the pundits are often wrong so nobody can guarantee this will occur.

End of Fixed Term: What To Do About Higher Rates

For existing homeowners and property investors coming to the end of a fixed term on a current mortgage, many are refinancing now to a different bank (that is to say, changing banks, especially when incentivised by a cash contribution).

• Careful evaluation of pros and cons of refinancing needs to occur before changing banks, to weigh up all likely costs - such as legal fees and termination fees - against all benefits
• Plenty of research also needs to occur: plenty of banks try and entice new business with great deals such as competitive interest rates, or a cash-back contribution

Just like anything other financial matter, what to do depends on personal circumstances, attitude towards the lending market, and aims, including what you want to do with any given property over the next few years.

Fixed or Floating?

Current floating rates are relatively high, so are usually only suitable for borrowers who want to be able to pay a lump sum off their mortgage or make extra payments without penalty.  

Fixed rates are not as attractive as we want them to be, however they are still lower than the floating rate. They offer people more certainty and ability to manage their cashflow better.

Fixing for some of the longer mortgage terms provides interest rate certainty for the next few years, but at a significantly higher cost than short-term rates. Many people are locking in a two- or three-year mortgage term for better certainty, however, fixing for this period may mean locking in rates at the 'top of the interest rate cycle', and could lead to regrets if interest rates were to fall during this time!

Sometimes, a combination of both is a way to go. It all depends on your situation, desire for certainty, future plans, and so on.

Your Next Steps

Whether you’re a first home buyer or property investor, property is still a great way to accumulate assets and create wealth.

At present, the tricky part is how to show a bank or other lender comfortable affordability using the banks’ interest test rates when applying for a mortgage. This rate is usually higher than the advertised rates online (every bank use their own, some increase their default expenses instead) to ensure borrowers could withstand another interest rate rise or increase in household expenses. This rate is much higher than recent years, and is causing many loan applications to be declined. How to best navigate this, and other issues is where the mortgage brokers (mortgage advisers) and financial planners at Become Wealth would be more than happy to assist.

For a complementary initial chat with a trained professional– which could include tailoring your mortgage to your personal financial position and determining whether it’s worth breaking your fixed term and/or shopping around mortgage providers – please get in touch today.