Summer is upon us!! Windy, rainy and sunny all in the same day. Then it rains for a week and the new builds are all out of schedule for an extra month! Nail biting stuff!
It’s fair to say that the weather is busy and so is the home loan/mortgage market at this time of year, so its timely we talk about why banks decline or defer mortgage applications.
Usually if you have a good deposit (20% residential & 40% Investment) you can afford it and you have good account conduct you are good to go.
We have accumulated our most common reasons (that we see) why banks decline a mortgage application, this gives you some idea of what we, and the banks, are looking at when approving home loan finance. As you will see the reasons are varied and numerous, the banks have tightened up on what they will approve, we’ll go more into the banks Responsible Lending Code in the next blog.
1. Collections lodged with Veda Advantage (Baycorp)
When a debt is not paid on time, the first sign of trouble is the establishment i.e. bank or finance company, sends the payment arrears to their in-house collections department, if the arrears are not sorted out or an arrangement can’t be made then the establishment sends the debt to an outside agency to take on the task of debt recovery. The final destination of the bad debt is lodged with a company called Veda Advantage (for a long time it was Baycorp). Once a debt is lodged with Veda Advantage it’s on your record for 5 years regardless, even if you paid the debt immediately. Usually, if the debt lodged is under $400 and is paid off, the banks are ok with this. Anything over $400 needs to be paid and two years must pass before the banks will look to approve. If you have any outstanding collections lodged with Veda Advantage the banks will decline. Bankrupts also show up on Veda Advantage, the banks cannot lend to anyone declared bankrupt for seven years or until they are discharged full stop.
2. Servicing/ low income/ too many other debts
Income is one of the main things that impact an approval. This is what the banks call “Debt Servicing”, in other words can you afford to repay the loan the banks approve. Often, we see clients with a good level of income but have other debts which effectively eat up surplus cash, the bank and WealthHealth don’t want to see you purchase a home then lose it because you can’t afford it. The main culprits which can affect your servicing ability are things like, car loans, GE, GEM Visa, Q Card and multiple bank credit cards. The trick here is to be patient and save rather than get things on credit (boring eh) but the extra debts could delay a home purchase up to 5 – 7 years once you stop spending and decide to pay things back.
3. Unsatisfactory account conduct (transaction account)
Account conduct is showing the bank that you can manage your finances and day to day living costs without getting into trouble. Account conduct issues that hamper approval are going into overdraft without an approved overdraft limit, being in overdraft with an approved limit and never going into credit, reversed payments (dishonour or honour fees) or concerning spending habits, i.e. numerous cash withdrawals on daily basis that could indicate a gambling addiction…trust me the banks pick this up.
4. No deposit/Low deposit
The Reserve Bank of NZ has tightened up its deposit requirements recently to try and slow down New Zealand’s property market and to boost inflation. They first applied higher deposit requirements in Auckland but this has now been applied to the rest of the country.
Minimum 10% is needed to make a purchase, we can’t get finance approved with $0 deposit now but things do change….
First home buyers could possibly get a home loan with 10% deposit, otherwise standard owner occupied require 20% deposit and investments require 40% deposit.
There are ways to get around the 20% and 40% deposit requirements using existing equity in either a parent’s home or an existing properties equity so call us to chat about it.
5. Banks run out of funding (less than 20% deposit)
Banks are now limited to a certain amount of lending they can have on their books that is over 80% lent (low deposit loans) usually its around 10% of their entire mortgage book. When someone has less that a 20% deposit there is a two-stage approval process. Stage one is bank approval (this is usually the easy bit) and stage two, the loan goes to the banks funding team to check if they have funds available to lend for loan over 80% of the property’s value. The funds banks have available changes daily, one day we can pre-approve and the next it could get declined. If a deal is declined due to “No Funding Availability”, we would have to reapply from the beginning to the same bank OR apply to another bank.
6. No genuine savings
This applies to low deposit loans, the main reasons banks like to see savings is that one, they can see you have good financial knowledge and two they can see you’ll be able to handle the jump from rent to mortgage payments as you are paying rent and saving at the same time.
7. Self-employed less than 12 months
We can usually get loans approved if you have been self-employed for less than 12 months depending on how tight the bank’s get, a bit of info is usually required:
• 12 Months cashflow projections (prepared by an accountant)
• Year to date financial figures (prepared by an accountant)
• Year to date GST returns (if applicable)
• Business Plan
We can look at options for you once you have been discharged bankrupt so talk to us.
9. Property location
If you are wanting to purchase property in the middle of nowhere then talk to us first as the banks have different deposit requirement for Rural, Farms and Lifestyle properties.
Phew, you still there?! We know that was a biggie and hopefully you are now armed with some useful knowledge for when you want to apply for a mortgage!