Generally areas with the lowest house prices have the smallest jump from average rent to mortgage payments.
Photo: Unsplash / Blake Wheeler
It’s a common complaint from first-home buyers: If I can pay $750 a week in rent – and have been doing it every week for years – why is that not enough to prove to the bank that I can afford a mortgage at that repayment level?
Unfortunately, it’s not that simple.
A repayment of $750 a week would service a $540,000 loan with a 6 percent interest rate.
A household with two borrowers and two children under 18 would need an income of about $115,000 a year to qualify for that, depending on their expenses.
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Data shows that it is generally the areas with the lowest house prices that have the smallest jump from average rent to mortgage payments.
But Jeremy Andrews, from Key Mortgages, said a number of factors would be involved when a bank was assessing an applicant’s ability to pay back a mortgage – and there would be extra costs that would be added to the $750 initial payment.
“The reality of owning a home is there are extra costs and allowances to consider both in your budget for buying and the bank’s assessment of affordability. Rates and insurance can be significant and easily $100 a week on top of mortgage repayments.”
He said maintenance was another expense that was usually covered by a landlord when people were renting but would need to be paid for by the homeowner if they bought their home.
He said banks would also need to see that people could service a loan with interest rates higher than the ones advertised.
“Bank test rates are always higher than the typical offered interest rates at time of application.
A 30-year mortgage will have fluctuating interest rates over time, so banks allow a buffer toward this called ‘assessment’ or ‘test’ rates – often this is at least 2 percent higher than current fixed interest rates.”
But he said if people were considering buying a home with enough bedrooms, they could count boarder income to help improve their chances.
Another adviser, Glen McLeod, said banks would take all of a borrower’s financial commitments and stress test them at a higher level to ensure they could afford the loan over the long term.
He said things like life or mortgage protection payments could also add to costs.
In July, first-home buyers were responsible for 21.2 percent of all new residential lending.
New Zealand’s average weekly rent is 22 percent of the average household income this year.
By contrast, that household earning $115,000 would be spending about a third of their before-tax income on $750-a-week mortgage payments.