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What miracle did this new home owner need?

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The Official Cash Rate, introduced in March 1999, is the interest rate set by the Reserve Bank to meet its inflation target, (currently 1 to 3 percent on average over the medium term), with a focus on keeping future average inflation near the 2 percent target mid-point.

The OCR is reviewed eight times a year by the central bank. Monetary Policy Statements are issued with the OCR on four of those occasions but unscheduled adjustments to the OCR may occur at other times in response to unexpected or sudden developments, but to date this has occurred only once, following the 9/11 attacks in 2001.

What does the OCR do?

The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a way of influencing the level of economic activity and inflation.

By international standards, an OCR is a fairly conventional tool and in the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. These mechanisms were more indirect and difficult to understand.

How does the OCR work?

Reserve Bank settlement accounts, held by most registered banks, are used to settle obligations with each other at the end of the day.

For example, money from the many hundreds of thousands of Eftpos and cheque transactions made every day is paid by your bank to the bank of the recipient.

The bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most important part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.

Visit the Reserve Bank website for more detail.

This aspect of insurance, depending on who you talk to, will have different meanings. For the most part it is about Life, Trauma and Total Permanent Disability (TPD) insurance specifically tied to your mortgage(s). In recent times with the introduction of Mortgage Repayment Insurance (MRI) this has become a more modern meaning.

In the first instance lump sum products like Life, Trauma and TPD, should be considered for reducing debt in the situations these products cover. Mortgage protection is usually aimed at 100% - 110% of the current balance of your mortgage. We do consider additional factors in our Debt Risk Management Planning that usually means cover requirements are higher than just the outstanding mortgage amount.

The more critical aspect is ensuring your mortgage payment is paid if you are disabled. This situation doesn't always mean you qualify for either Trauma or TPD so insuring your mortgage payment amount is important.

So you say, "this sounds like income protection", and you would be right to a point. With normal income protection you have offset of ACC payments for accident related disabilities, with Mortgage Repayment Insurance you don't have these offsets so you have more certainty that your mortgage repayment will get paid.

Even though every Bank looks at your ability to get a mortgage in a different way, they all have things in common they look for to make sure you are a good risk for them – especially if you are a new client to the Bank.

Below are some guidelines on how we get the Bank to say "yes":

Savings history

A new Bank has no idea how well you will pay off a loan. The best way for them to get an idea is to see how well you save. A deposit saved over at least 6 months shows them you can commit to depositing money on a regular basis

Age vs. Stage

If you are younger in age the Bank does not expect you to have a lot of assets vs. what you owe against them. However, if you are a bit older and have been earning a good income for a period of time then they expect that you'll have a better statement of position. There are always good reasons why people don't have as much saved as they should but, without a good explanation, the Bank will think - Good income for a long period + lack of savings = bad risk for paying back a big loan

Current account statements

The Banks will ask for your last 3 months worth of "everyday" statements. This isn't to check how much you earn (this is proved in other ways) but it is to see what your account conduct is like. Bounced cheques, honour or dishonour fees are a red flag to the Bank

Credit History

This is another measure for the Bank about how you are (or have been) at paying back debt. Again, there can be a number of reasons why your Credit is bad but make sure you have a good explanation upfront

Multiple bank enquiries

You might think that applying to every Bank at once might increase your chances of getting a loan but it works against you. The first thing a Bank does is a Credit Check, if they see 4 other Banks have done the same thing then they know they have a 20% chance of getting the deal – this doesn't make them want to put 100% into getting it approved for you! All Banks are measured on 'conversion' ratios from approval to settlement so make sure the deal is theirs until they say "no". A good Mortgage Broker will make sure you are going to the one lender which best suits your needs.

Finally – Don't try to hide anything!

The Bank will probably find out and this will end your chances of approval

Just like property value peaks and troughs, the ability to borrow follows similar patterns.

The lending cycle generally loosely follows the property cycle, but lags behind it.

When properties are valued most lending is easiest to get and even when it starts the first part of the decline phase the lenders often take a little while to change their policies.

Similarly when property values start climbing after a trough Banks tend to take their time easing policies.

Like any business banks earn money when they have their product out in the marketplace. After a period of "bust" where money has been hard to lend they start relaxing credit policies, generally by increasing loan-to-value ratios against properties e.g. when property values are low they may lend to 80% of a property's value and when values firm they go to 95% (or even possibly 100%, as in the last cycle).

As increases in values are sustained and interest rates are lower they tend to ease up on how much you need to earn to borrow more i.e. for the same income you can borrow a greater amount.

No matter what the Bank says, the key to borrowing at any time of the cycle is down to your personal circumstances and how you feel about it.

At Edge Mortgages we pride ourselves at looking at the full picture when it comes to your borrowing requirements and looking at where you want to be not only now, but into the future. Give us a call to discuss your plans.

With more positivity about the future of house value increases the banks, and other lenders, are increasingly freeing up credit policies.

As a company who arranges funding 24/7 we have access to a range of different lenders to make sure we can find a deal that suits you. Going to the bank yourself limits your options and potential to secure a deal.

Given the relaxation in criteria we are currently arranging mortgages for clients across the following areas, including:

  • 95% lending + 5% gift (or short-term loan) Credit impaired borrowers
  • No proof of income
  • 90% investment purchases
  • Development funding

The fact is that there is no one-size-fits all in terms of mortgages and we tailor every loan to the individual client.

If you are thinking about borrowing for any reason, against any sort of security, it pays to talk to us first!