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House prices may be declining and mortgage interest rates may be rising, but the amount first home buyers are paying to get their own home remains at or near record highs.
According to the Real Estate Institute of NZ, the national lower quartile selling price peaked at $670,000 in November last year and since then has declined by $42,000, dropping back to $628,000 in May.
Over the same period, interest.co.nz estimates, based on Reserve Bank lending figures, that the average amount paid for homes by first home buyers has increased by $11,000, rising from $705,000 in November last year to $716,000 in May.
However the figures suggest that the recent increase in the amount being paid by first home buyers has been entirely driven by those first home buyers purchasing a home with a low deposit of less than 20%, and consequently a high loan-to-value ratio (LVR) loan.
Between November last year and May this year the estimated average amount paid by first home buyers with a minimum 20% deposit decreased from $702,000 to $697,000, while the estimated average amount paid by first home buyers with less than a 20% deposit increased from $709,000 to $761,000.
Not only are first home buyers with a low deposit paying higher prices on average than their counterparts with a full 20% deposit, they are also borrowing a lot more.
The average mortgage approved in May for first home buyers with less than a 20% deposit was $127,000 more than the average mortgage approved for first home buyers with a minimum 20% deposit.
And low deposit buyers will be paying through the teeth for the privilege. Banks typically charge additional fees and higher interest rates for low equity loans, to reflect the higher level of risk involved.
So low deposit borrowers will almost certainly be facing considerably higher mortgage payments than their counterparts with a full deposit, and because they would also have less equity in their home, they would have less room to restructure their loan if they faced unexpected financial hardship.
The latest Reserve Bank figures show that although the proportion of new mortgages being approved to first home buyers with less than a 20% deposit is lower than it was a year ago, it has been increasing rapidly over the last few months.
In November last year when house prices peaked, low equity loans accounted for 34% of mortgage approvals to first home buyers and that figure had dropped down to 16% in March this year but had risen back up to 30% in May.
That could explain why banks appear to be reining in low equity lending, with the country’s two biggest mortgage lenders, ANZ and ASB, both this week announcing a pause on new low equity mortgages.
Although low equity loans make up a relative small proportion of total mortgage lending, at a time when house prices are falling and interest rates are rising, a lot of the risks the banks face are likely to be concentrated in that relatively small number of low equity borrowers.
It may be that banks are simply deciding that the risks associated with those loans are currently not worth the extra business they could bring in.
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