Different lenders' risk appetites could see you secure a 25% larger home loan if you opt for one lender over another, according to case study

Different lenders' risk appetites could see you secure a 25% larger home loan if you opt for one lender over another, according to case study

The stress tests different mortgage lenders use could see a borrower secure up to around 25% more from one lender over another, according to a Mike Pero Mortgages case study.

The mortgage broker presented a couple with a clean credit history, combined income of $130,000, savings of $100,000, and monthly expenses of $2,032 to three bank and three non-bank lenders.

It found the most the couple could secure for their 30-year mortgage was $813,000; the least was $648,000. That’s a $165,000 difference

This is how the lenders’ risk appetites affected the amounts they were willing to lend:

Lender Bank 1 Bank 2 Bank 3 Non-bank 1 Non-bank 2 Non-bank 3
Borrowing power $813,000 $755,000 $648,000 $785,000 $670,000 $754,000

Mike Pero Mortgages explains that when lenders assess a person’s ability to repay a loan, they use an interest rate that’s higher than the rate to be offered to the borrower. So if rates increase, the borrower should still be able to make their loan repayments.

“Each bank has a different appetite for risk, so what we’re seeing is lenders stress testing anywhere from 7% right up to 8.5%. This means there are big variations in how much both bank and non-bank lenders are willing to lend Kiwi home buyers,” Mike Pero Mortgages CEO, Mark Collins, says.

“Lenders tend to align stress testing thresholds with movements in the official cash rate. However, they do have the ability to adjust their stress testing levels outside of OCR movements.

“In the last few years, even with the cash rate at record lows, the banks have ‘self-regulated’ by increasing stress testing levels.

“But now the heat is out of the market, and the LVR restrictions are slowly being relaxed, the banks are open for business again and we might see a relaxing of what’s been a conservative approach to testing loan serviceability.

“Buyers outside of the main city centres are just as affected. While the numbers we’ve presented may relate more to a buyer in a major city like Auckland, there’s going to be a significant variance in how much each lender will allow you to borrow for any property price.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

In their 'test' did Mike Pero advise the security value? I would have thought that's an important factor.

Presumably they all did pre approvals based on 20% deposit - which the customer did not seem to have.

Otherwise, with savings of $100k toward deposit, this implies lenders would do 89% LVR.... in which case (as most charge higher interest rates for low equity loans) the servicing cost would be higher.

Mike Pero is simply pointing out that servicing calculators vary from bank to bank... and thus its implied you should go talk to Mike Pero :-)
They are correct that the variance between banks is substantial.

dp

So I used Interest's mortgage calculator, threw in my 11 percent deposit on my 913000 home , stress tested myself to 7.5 percent over 30 years , only 5685 a month. Dropped the term to 25 years , only 8 dollars over 6000. Easy . Of course my expenses remain the same, mortgage rates ,the non stress kind will never rise..

Yeah, but whether any bank approves an 89% loan is another story.

RBNZ data Feb 2018, LVR above 80 percent 362 million,of which first home buyers 222 million from total 727 million , up from 140 million February 2017.

It's still a limited segment, and probably has higher servicing requirements applied. $362m represents just 7.7% of total new loans (4.7b) for the month... so, in other words... not that many people get approved.

My point was simply that in this theoretical mystery shop Mike Pero did, what was the security value... as this just as important (if not more) than income requirements.

FYI According to https://www.rbnz.govt.nz/statistics/c30 Feb 2017 was 280m.

Thus proving my point that high lvr loans are scarce