There have recently been calls for the Reserve Bank to be given more power than just controlling the Official Cash Rate. On the wishlist, among other weaponry, is the ability to regulate loan to value ratios – that is, how much of a house’s value you can borrow, and how much of the deposit you need to save.
“Good idea,” thought deputy governor Grant Spencer as he reclined in his leather armchair and sipped his camomile tea (I assume). As it turns out the RBNZ can already do this, if recent news is anything to go by.
Mr Spencer, tipped by many to be the next Reserve Bank Governor, has been openly musing about the idea of setting the minimum home deposit at 20 percent – giving us an LVR of 80%. This would have far-reaching effects on the home loan market and first-time buyers, as Mike Pero and others point out.
Twenty percent deposits were the norm two decades ago. During last decade’s housing boom banks were known for their generosity; 100 percent loans (yes, that’s a zero deposit required) were not unheard of. When the world’s financial system turned to custard in 2008, banks started insisting once again on 20 percent minimums. This has since been relaxed, and ten and five percent deposits are available once again. I’d draw a graph, but now I’m too dizzy.
Saving for a first home can be a most consuming experience. Of course an obvious, and compelling, point is the more you save the less you have to borrow. Interest.co.nz’s Rent or Buy Report (which I explored in an earlier post) estimates it will take 3.4 years, at a saving rate of 20 percent, for a household (two incomes) to reach a 20 percent deposit for a first home. For those who can save this at a reasonable clip the proposed rule change will make little difference. An 80 percent LVR, however, is no help to those who can’t.
There are other pitfalls. Existing homeowners may find it harder to increase their current mortgage. Helen O’Sullivan, chief executive of the Real Estate Institute of New Zealand, suggests there may even be a risk of a property market crash if the LVR was wound back to 80. But it’s not all bad, she says: some restrictions could prevent future housing bubbles, and “the issue with bubbles is that they tend to burst.”
There’s another trend we need to tie in here. Right now mortgage rates are nosediving faster than The GC’s ratings. Bernard Hickey is encouraging homebuyers to “bully your banker” into giving a lower than advertised rate. It’s a good time to be a buyer, but if the Reserve Bank introduced an LVR of 80 percent today there’d be a lot of sad bullies left hanging. Who knows what the mortgage rate might be by the time they’ve stolen enough lunch money to reach the threshold.
Presently, people can borrow according to their circumstances. First-time buyers can get more leeway so they can break into the market. Balance is essential: too much leeway and some will end up drowning in debt. But, if homebuyers can benefit from a lower mortgage interest rate with a smaller deposit, all power to them.
Banks, as we have seen especially in the last few years, vary the LVR depending on the state of the economy, the health of the property market, and the ability of homebuyers to repay.
One size doesn’t always fit everyone, or every condition. Sure, the current system is not perfect – but no system is. Many benefit greatly from paying a higher deposit. Others ought to be talking to their bank about getting one of those low low mortgage deals available now.
To work out how much you should save for a house, check out one of the many online calculators offered by the banks and mortgage brokers.
I also highly recommend this short primer on loan to value ratios by Fundit.