The proposed inclusion of a debt-to-income (DTI) ratio tool in the Reserve Bank’s toolkit was largely met with criticism in a series of submissions, with ANZ New Zealand saying it is fundamentally flawed and Cooperative Bank calling it a blunt, unproven instrument, BusinessDesk reports.
The central bank initially sought to include serviceability restrictions or a DTI tool as part of a macroprudential toolkit that includes restrictions on high loan-to-value ratio (LVR) lending aimed at curbing an overheated housing market.
Whenever you are thinking about buying a property one of the first things to consider, and to arrange, is finance. Most of us will need a mortgage to finance a purchase.
The first step is to find out how much you can afford. We have access to the actual calculators that the banks use, so we can give you a good idea about how much they will lend you.
After that we need to make sure that the bank agrees with our estimations. To do that there are two types of approval that we seek.
A Pre-Approval is where we go through the full application process with the bank and get them to provide an offer based on them being happy with the property you eventually find. It is an approval where you have not found a property yet and gives you confidence to offer a purchaser an amount up to the level the bank has pre-approved.
A Pre-Approval is the first thing you should arrange BEFORE you start looking for a property as it provides clear guidelines for the maximum amount you can spend and ticks off many of the conditions the bank needs satisfied.
The approval is one step above a Pre-Approval. It is where the bank is happy (in principle) with the property you have found but there are still some items to be satisfied. These conditions can be a number of different things but may include a Valuation, proof of deposit or sort-term debts to be repaid (as examples).
This approval type is one where we have satisfied all the banks conditions in regard to funding for a specific property. It is ultimately where every successful loan application ends up and is also very important to have is you are thinking about bidding at an Auction. Winning an Auction means that you are committed to buying the property.
If you are starting the search for property, then the very least you should get is a Pre-Approval.
We can help arrange this for you and guide you through the steps needed to turn this into an Unconditional Approval
Funding for property trading is more specialised that getting a loan through a trading bank.
Property traders make their money by buying a property at a price which allows them to make a profit by selling it for a higher price – normally after a relatively short period of time.
Trading banks make their money by holding a loan for (hopefully) a long period of time. The small margin they make between what they can purchase funds for to on-lend to customers makes money for them over time.
Funders for property traders however know that they are only going to have their funds lent out for a short period of time so cannot rely on the interest rate margin to make them a profit. For these reasons they charge an upfront fee and a higher interest rate.
These funders also take more of a risk in that the borrower normally does not have the ability to service the debt. The funders rely on a “take-out” for the deal they are funding – for example, if you can purchase a property with a long settlement – and secure an on-sale of that property – then these types of funders would lend based on the guarantee of getting their money back once the property is sold. If you had a loan offer from a standard trading bank – once certain conditions have been met over the period of alternate funding – then this is also seen as a “take-out” for this type of funder.
Times you would seek “property trade”/alternate funding:
- When purchasing and on-selling a property within a short period of time.
- When purchasing a property that doesn’t fit with a trading bank immediately.
- There are past loan payment or credit issues which need to be sorted out over 6 months to take back to a trading bank.
- You purchase a property cheaply with a good valuation and you want to have the bank rely on the valuation and not the purchase price.
- You are purchasing a non-traditional property which needs modifications before a bank will accept it.
There are good commercial, as well as practical, reasons to use property/alternate funding. This type of funding is often only available through brokers like us who have experience and contacts in this area.
If your home has increased in value since you bought it, or you have built up equity in it, you could borrow more money to, for example, fund home improvements or refurbishments or to raise a deposit for a holiday home, or perhaps as a rental investment property.
You can also top up your home loan to consolidate your debts and pay them off as a single loan, a mortgage over your homewill almost always be cheaper than short-term loans or hire purchases.
Some lenders will also offer specials if your top up is to pay for energy systems such as solar panels.
Increasing your mortgage for home improvements might also add value to your property.
To top up your mortgage you’ll need to have existing equity in your property, or be able to create more equity by using the funds from the top-up to create it. There is usually a minimum top up amount of (for example) $5,000.
A top-up can be added to your existing home loan,or taken out as an additional loan. Any time you increase your mortgage it makes sense to review your overall lending.
The amount you are able to borrow depends on:
- what the top-up is for
- how much of your home loan you’ve already paid off
- the value of your home and what your Loan to Value Ratio (LVR) is
- if you can afford the repayments of the new home loan amount(s) once you’ve added your top-up amount
- The bank or funder where you have your lending
There are many variables when it comes to increasing your mortgage and the bank will look at more than the amount you are applying for as a top-up. They will look at the total of all the borrowing you currently have with them when making a decision about whether to lend you any more.
Investing in you own home or investment property has been a part of life in New Zealand for many years. As a result of this, there is a danger that borrowers lose sight of the fact that borrowing for property will most likely be the biggest financial investment most of us will ever make.
Whenever you are undertaking a large project that has the potential for increase – or more importantly a loss – then you need to make sure you surround yourself with a great team. We are here to arrange the funding and help with the financial structuring, but we do this in conjunction with other important members of the Property Team.
Property Team Members
Vital when it comes to any type of buying or selling as the conveyancing is completed through them. As well as giving advice on, and setting up of, different types of holding companies, Trusts or Partnership agreements etc. and any type of relationship agreements that need to be put in place to safeguard the parties involved.
Important when it comes to the initial borrowing (if you are Self-Employed), on advising the best ownership and borrowing structures and finding ways to maximise the tax advantages you may get through these structures.
Many people do not have the time or desire to deal with finding tenants or managing them during the time they live in their rental properties. This is where Property Managers are invaluable – they take care of the sourcing of Tenants, and look after them to make sure if anything goes wrong that you, as the Landlord, can rely on them to take care of the problems. More and more there are a number rules and laws that apply to rental property and Property Manager will also make sure the Landlord is aware of these and that the Tenant is looked after. Failing to abide by these rules can result in fines or worse. For a small proportion of the rental income they take care of all of the above and provide monthly and annual statements which makes the Landlords life easier (along with the Accountant’s).
Valuers and Building Inspectors
Most Trading Banks now insist on ordering the Valuation directly but there are always times when the recommendation of a good Value is invaluable.
The services of a Building Inspector are also often needed, especially when is comes to look at homes that are of different construction. Any property is a huge investment and making sure you are getting a good one before you commit to buying it is very important.
How do I find members of my Property Team?
We have been arranging finance for borrowers for many years and have many we can put you in touch with. We will always look for the best fit for our clients depending on their different needs. It is never a “one size fits all” solution and because we deal with such a large range of lending requirements we have built up a large group of talented professionals we are happy to recommend. We discuss this with clients during the application process but if you would like to talk to us about this separately then please get in touch