Would you make the cut if income curbs were applied to your mortgage?

In the UK around 19 per cent of loans made to London home-owners were above the cap of 4.5 times income. Photo/Getty Images.

I'll admit it - the hubby and I wouldn't make the cut if new loan to income rules were introduced for mortgage lending.

Our debt exceeds my part-time income by about 10 times at the moment with the husband currently out of work.

But that doesn't mean we are about to lose our house.

The thing about borrowing is that it's very personal.

Putting a one size fits all cap on how much you can borrow based on your income, as proposed by Treasury last week, seems to forget that borrowers aren't all the same.

Sure it makes sense from the outside.

If lots of people borrow heavily and the economy has a down-turn leading to lots of job losses or business failures then the odds are some people will not be able to pay for their home loans putting the lender in a tough position.

But there are steps that can be taken to prevent this happening.

Individuals can provide their own safety nets by having savings, income protection insurance or mortgage insurance.

Likewise lenders can also protect themselves by taking on less risky borrowers and limiting lending if they believe the economy is going to turn for the worse.

In the UK where a cap of 4.5 times income was applied in October last year the change only applies to new lending or existing borrowers who want to borrow more money which takes them over the cap.

If that was applied here existing borrowers wouldn't have anything to worry about unless they wanted to increase their loan above the cap.

But it would mean first home buyers were yet again hit in what is already a very tough market for them.

David Tripe, a banking expert with Massey University, says it could be just as damaging for first home buyers as loan to value ratios.

"I still think it is going to cause the same problems for first home buyers that LVRs are."

Even still, he believes loan to income caps should be considered here to help stop speculation occurring.

"What happens is when people get optimistic - in normal times banks would not lend above certain levels - but when the market is growing so strongly there are temptations to let higher lending slip through.

"You get people throwing caution and commonsense thoughts to the wind.

You get people throwing caution and commonsense thoughts to the wind.

David Tripe

"At some stage or other it would not be unexpected that commonsense had been abandoned - that may be happening now but we don't know."

And that's part of the problem we just don't know if people are already behaving like this.

The Reserve Bank has said it is in the process of collecting data from the banks but that will take time.

Based on similar data collected in the UK it's unlikely to be a widespread issue.

Nationally just 10 per cent of new lending was over the 4.5 times cap but in London it was 19 per cent.

In the UK the limit was designed as more of an insurance policy to stop people from getting carried away with borrowing more in a hot property market where punters can only see house prices rising further.

That could be happening in Auckland.

House prices have risen in Auckland by an average of 24 per cent in the last year and new supply has yet to increase enough to meet demand.

New migrants keep pouring into the city and fewer people are leaving to go overseas.

You can see why some people think they can't go wrong with buying a house in Auckland and why they may not be worried about stretching themselves to the limit.

But Bankers Association chief executive Kirk Hope believes banks are already doing enough and that a loan to income cap would be a blunt measure.

He says banks are far more interested in whether a person can service their mortgage than multiples of their income.

"There are multiple factors banks take into account."

Hope says banks are already stress-testing people's ability to make their mortgage payments at higher interest rates by adding around 2 percentage points to fixed loan agreements.

He says this system is robust because actual mortgage defaults during the global financial crisis and the New Zealand recession were less than 0.1 per cent of loans.

"That tells you not only were banks being responsible in the lending process but people themselves are pretty responsible.

"They know there is no use in having a flash house if you can't do anything."

But what about those "greedy investors" everybody knows they just borrow based on equity don't they?

Hope says equity is only one factor banks take into account for investors.

"You can't pay your loan with equity. Banks require higher levels of equity if you buy a second property."

"It comes down to that old saying - you can't eat your house - and you can't pay your mortgage with equity."

What do you think?