26 Oct 2018

First home buyer dreams hindered by existing debt

8:15 am on 26 October 2018

The hopes and dreams of some wannabe first-home buyers applying for mortgages are being dashed because of credit card debt and personal loans.

Sold sign outside a new house being built in East Auckland

Photo: RNZ / Claire Eastham-Farrelly

The First Home Buyers Club surveyed almost 900 members and found more than half had debts, excluding student loans.

The debt ranged from $500 to $80,000 and averaged around $8000.

Spokesperson for the company Lesley Harris said high living costs fueled by high rents and transport were putting pressure on people's accounts.

"Credit cards are a real issue and also we're in a climate where credit is so easy to get.

"It's just so easy for people to take out debt so I think rising debt is not just about rising costs but also around the freedom and accessibility of people to be able to get all sorts of different lending."

But when it came to securing a home she said now more than ever that debt was catching up with people.

"People can find the house, they can get the deposit together but if they have debt, or if they don't have enough income to service their mortgage, they will not get a loan from the bank. That's the biggest issue and it's also an issue that no one seems to be actually doing anything about or talking about."

She said banks had become stricter in recent times when it came to lending to people who had existing debt.

While schemes like low deposit Welcome Home loans and efforts to build affordable housing were commendable, she said they were no longer the main issue at hand.

"I think we can tick a few boxes in terms of the spotlight that's been put on the problem but what we're not looking at is this very, very, real problem which has become tighter and tighter over the last six to 12 months.

She said the only solution for would-be homeowners would be to get rid of existing debt.

"There needs to be a focus on education, and even perhaps as early as in schools, around financial education and responsibility.

Chief executive of Mortgage Lab Rupert Gough said many first home buyers owed money and underestimated the impact it would have when they apply for a loan.

"It tends to be a blanket no these days. Certainly a couple of years ago if it was a bit tight a bank might look at the overall character of a person and push a yes. These days it tends to be a blanket no if it doesn't meet the income calculator from the bank.

In June last year the Responsible Lending Code, which sets guidelines for lenders, was updated.

"They fall under a responsible lending criteria now, they can't be seen to loan money to people who can't afford it so they are testing that much more heavily. So they're having to draw the line where they weren't previously drawing the line. It's a new problem, not the debt, but just the inability to get the mortgage in the grey areas.

"They've just been through the Royal Commission in Australia which has really hammered them for irresponsible lending over there so the local banks are nervous about that, which is a good thing. They're thinking about whether a person can afford it, so really it's down to the clients to show that they are the fit person for it and a lot of that is getting rid of that debt."

He said many people were also being caught out for credit card limits they weren't even spending.

"By our calculations the limit of your credit card, lets say it's $10,000, would affect the amount of mortgage you could get by five. So a $10,000 limit reduces your ability to borrow by about $50,000 the majority of the time So it's really just an under appreciation of that small limit on a credit card can vastly impact a mortgage.

"The bank has to assume you're going to max out your credit card, they have to assume the worst case scenario, so even if you pay off your credit card every month they take the limit of your credit card not your average balance for instance.

The chief marketing officer for Kiwibank, Mark Wilkshire, acknowledged there has been some tightening of lending criteria.

"I think it's fair to say there has been some tightening in the market over the last six to 12 months and for Kiwibank, all we're trying to focus on is making sure that customers can repay. If they have any other debt, or other student debt, just like any other form of repayment it's important they can basically pay it now but also in the future when rates might go up ... it's important they can sustainably look after their debt and repay on a regular basis."

He said the market had been more focused on responsible lending after last year's update.

"I think there has been a response from industry looking to make sure to review their settings, make sure that the monthly living expenses, all of those things are at the right level... So I think you have seen some of those updated recently, and I'm talking probably in six to 12 months ago for some of those changes."

However he said easing by the Reserve Bank in January to let banks give out more low-deposit loans had seen more first home buyers entering the market.

He said first home buyers weren't being cut out because of debt and the market was open for business.

"It's just a matter of sitting down with those customers and making sure that they can repay it and it fits in with their monthly repayments and they can reasonably afford that.

"Anyone looking at a customer will look at their ability to repay, have they got good history ... but having other debt is not an issue as long as they can repay it.

However he agreed people needed to be more mindful that taking on debt would have an impact later on.

"They've got to be careful around how much debt people take on, how much consumer finance they take on, how much student debt people will clock up. So being careful about that and managing that is important when they come to get a home and want to be able to service that. Because that will be taken into account when they sit down with their banker to work out what they can afford."

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