A typical case, says William Cairns, director of mortgage provider General Finance, will be a family moving from Wellington to Auckland for work. The family buys in Auckland and needs some breathing space to sell the Wellington property. If nothing else it gives a seller time to clean up his or her property to get a better price. "I have seen people win on both sides of the equation," says Cairns.
Buyers often assume their main bank will lend bridging finance. If it doesn't, they may panic.
Bridging loans aren't cheap. General Finance charges 11.95 per cent a year. This, however, is only for one to six months, not the life of a mortgage. The interest payments can also be capitalised, meaning that the borrower doesn't make repayments until the property being sold finds a buyer. The interest payments mount up into a lump sum.
We hear little about bridging finance. In part this is because mainstream banks are more risk-averse than they were. They are available, but not everyone who wants one from the bank will get one. Having one owner sitting on two properties is risky.
In order to qualify for a General Finance bridging loan, a borrower would need to have reasonable equity in the property and be in a market where the old property could realistically be sold. Someone moving from Kingsland to Grey Lynn in Auckland, for example, would be buying and selling in two hot suburbs. Such a borrower would be looked upon favourably by a bridging finance lender - all other things being equal. It may be more difficult to get a bridging loan for a move from the Far North or Wanganui into a hot housing market.
If the old property can't be sold, the buyer can find him or herself facing financial ruin. Cairns says he has never had to take a property to mortgagee sale in this situation although it could happen. "We are sympathetic and we would consider rolling it over." He would suggest dropping the price to dispose of the property for sale.
The tightening of the mortgage market has made it more difficult for self-employed people to get mortgages, says Darren Pratley, director of The Home Loan Group. It's quite common that their income on paper doesn't reflect their disposable income.
To borrow $500,000, you would need an income of $120,000, says Pratley. A self-employed person might have massaged his or her income on paper down to $80,000. That's great when it comes to coughing up money for the tax man, but not so good if you need to borrow money from a bank.
In the past it was relatively easy for those people to get self-certified "low doc" loans. These are mortgages where the borrower certifies that he or she is earning sufficient income to service the mortgage and backs up the claims with GST returns for the business.
Second-tier lenders such as RESIMAC Home Loans lend to such people. The interest rates aren't that outrageous considering the lender is carrying more risk than banks do on typical loans. RESIMAC's low-doc prime rate is 7.59 per cent variable and up to 7.94 per cent fixed. Borrowers will usually need a 30 per cent deposit in order to get a low-doc loan.
Another tricky borrower is one with blots on his or her credit record. General Finance offers what it calls "cleansing mortgages" at 11.95 per cent for borrowers who fall into this category.
The problem that makes the borrower undesirable to a bank is often due to a divorce, business failure or redundancy, says Cairns. "It means the borrower is no longer bankable, but may still have a reasonable job or will get something good. We will lend money to them for six to 12 months then they go back to the bank."
A classic example was a professional couple who returned from overseas last year. The pair had little work history in New Zealand and only one of them was working.
Although they didn't qualify for a bank loan, the cleansing mortgage meant being able to buy a property in a rising market, which paid off in capital gain. The property has been refinanced by a bank.
Cleansing mortgages get "good people" out of a hole, says Cairns.
Property investors are another group who can find getting a mortgage tricky.
Many still expect to be able to walk into the bank and get money to expand their portfolio as and when they need it, says Pratley.
"The perception you can borrow up to the max is causing the most difficulty with investors."
When they can't borrow they see lost opportunity, says Pratley.
One problem is that investors are being asked for 30 per cent deposits. They may even be treated as commercial borrowers with higher deposit requirements still.
Pratley says one way around this is to borrow against other property with one bank to raise the deposit and then get the main loan with a second bank. This way the investor's home isn't on the line for the entire mortgage.
Then there is the first-home buyer. Although it was possible seven to 10 years ago to buy your first home with no deposit, banks are now bound by the Reserve Bank's loan-to-value ratio (LVR) restriction to lending 80 per cent of the value of a property.
It's best to look positively on such restrictions. First, they are only temporary. What's more, banks can still lend above this for 10 per cent of new residential mortgage lending, and you could qualify. There are exemptions for building a house and for Housing New Zealand's Welcome Home Loans.
The first thing Pratley does with first-time buyers who are struggling to get a deposit together is to look at their KiwiSaver situation to see if they can raise a deposit that way.
He also asks if a family member such as a parent could help provide a deposit. Pratley, like many mortgage brokers, is reluctant to let parents provide joint security on the home of one of their offspring. The reason for this is that the parents are putting their necks in a noose.
Banks usually get parents to sign a document to guarantee all of the child's borrowing, not just the deposit. If the borrower falls behind in payments on the mortgage or other lending, the bank can take the parents' home.
Another way around LVR restrictions is to borrow from a non-bank lender. They aren't subject to the Reserve Bank constraints, says Pratley. RESIMAC, for example, offers mortgages to borrowers with as little as a 10 per cent deposit, but charges 8.59 per cent interest variable and up to 8.94 per cent fixed. Although higher than standard bank mortgage rates, they provide a foot in the door of a first home.
That's a lot to pay over 25 years. But the reality is that it might only take a year or two for the market to rise sufficiently to refinance with a bank at a lower rate. If that's the case then the higher interest rate might be tolerable.
