The Government’s Budget 2022 announcement around its First Home Loan and Grant schemes is a step in the right direction to help new buyers get a mortgage. But don't hold your breath: huge hurdles remain for first home buyers
On paper, the announcement from Housing Minister Megan Woods appears to right a much-heralded wrong - changing the eligibility criteria for the Kāinga Ora First Home Loan and First Home Grant schemes so more people qualify for the mortgage help the programmes are meant to provide.
Increasing the house price caps for first home grants could contribute to 7000 more people being eligible for a grant of up to $20,000 towards the deposit on their mortgage, according to the Government’s own Budget 2022 figures.
Abolishing the house price cap altogether for the first home loans should help 2,500 would-be home owners qualify for a five percent deposit mortgage, as opposed to the normal 20 percent.
On paper, that’s a big deal - almost 10,000 more people getting into their first home than would have done under the previous Kāinga Ora settings.
There are other positives. Under the new regime, house price and income caps will be reviewed every six months, answering the criticism the scheme has become increasingly unworkable as house prices have gone up, while loan and grant eligibility caps have stayed the same.
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In the past three years alone, the number of government First Home Grants handed out has shrunk from 15,470 between April 2018 and March 2019 to 6834 in the same period in 2021-2022.
The number of homes bought with a government-backed First Home loan fell from 1290 (not a particularly high number to start with) in 2018-2019 to 767.
Lifting those numbers by an extra 10,000 a year would definitely be a step in the right direction - if it happens. The trouble is, some experts warn a whole bunch of other mostly banking-related hurdles for first home buyers make those figures pretty optimistic.
Some say the moves will hardly turn the dial at all on first home ownership.
'Glimmers of hope'
Lesley Harris is a director of the First Home Buyers Club, a company that pulls together information for potential home owners, as well as offering links to service providers.
Harris sees “glimmers of hope” from lifting the house price caps on the First Home Grants that more buyers will be able to access the government money - from $5000 for a single person buying an existing home to $20,000 for a couple buying a new property.
Over the past two years, an upper purchase price limit of $625,000-$700,000 for homes in Auckland to qualify for the scheme, has meant virtually none did. Now that cap has gone up to $875,000.
In Queenstown-Lakes, the caps have moved even more - from $600,000 to $875,000 for existing properties and $500,000 to $925,000 for new ones. There are similar hikes in Wellington, Nelson-Tasman and Napier-Hastings.
“I would rather see caps removed altogether and not discriminate against any first home buyers, still this is a bigger jump than we have seen previously,” Harris says.
But problems remain. If you are a couple struggling to raise a 20 percent deposit on a $875,000 home ($175,000), a Government payment of $10,000 or even $20,000 is good, but for many people probably not enough.
What most locked-out first home buyers need more than the grant is a First Home Loan, which gives them the chance to get a mortgage with a five percent not a 20 percent deposit.
That’s a significant financial gain. For a $875,000 home, a 20 percent deposit means finding $175,000; a five percent is only $43,750. At $650,000, a 20 percent deposit is $130,000; five percent is $32,000.
With the Budget 2022 announcement removing house price caps completely on First Home Loans, the door should be open to a lot more potential buyers.
But there are other limitations to do with the fact that despite the scheme being backed by the Government, the mortgage still comes from a bank.
For a start, only two banks are signed on to the First Home Loan scheme - Westpac and Kiwibank. Other banks, including the largest, ANZ, aren’t offering them.
Then there is the fact that strict Reserve Bank rules around loan-to-value ratios restrict the amount of money banks can lend out with less than a 20 percent deposit.
In theory, a Kāinga Ora First Home Loan is exempt from Reserve Bank restrictions, though in practice potential borrowers might still be stymied by how much a bank is prepared to lend and what LVR concerns it has.
Mortgage broker Oliver Broomfield says another big problem for borrowers is the level of “stress testing” banks are applying at the moment before approving mortgage lending to new borrowers, particularly first home buyers.
“With the ever-increasing cost of living, stress test rates with some lenders are as high as 7.35 percent," Broomfield says.
This means a borrower has to prove to the bank they could service a loan with an interest rate of 7.35 percent, as opposed to the actual interest rate at the moment of 5.85 percent. Some customers won’t be able to do this, he says.
Meanwhile low equity premiums (higher interest rates charged to customers taking out loans with less than a 20 percent deposit) are also hitting some borrowers hard.
“Low equity costs add a 1-2 percent margin on interest rates or come as upfront fees, which in most cases cannot be added on to the mortgage.
“Unfortunately for about a third of first home buyers, properties are still not affordable and are far from their reach,” Broomfield says. “These properties will continue to be picked up by professional couples or property investors who do not need first home buyer grants.”
At the more affordable end of the property market - apartments - first home buyers in cities such as Auckland and Wellington are also being kept out by banks’ refusals to lend with under a 20 percent deposit.
As Newsroom has noted in other articles ("The lending trap: Small apartments, big deposits") banks have more strict lending criteria for apartments than houses, including being very reluctant to lend on less than a 20 percent deposit - more than 20 percent if the apartment is small.
Andrew Murray, chief executive of Auckland-based company Apartment Specialists, is frustrated that the new rules will likely make little difference to his clients.
“With apartments, it’s meaningless [to change the price caps for the First Home Loans] until the Government looks at banks and how they are treating apartment lending. The Government talk about apartments as the future of our cities, but banks are purposely not lending on this stock.
“The announcement is definitely a move in the right direction, but the Government needs to put pressure on the banks to remove the roadblocks in terms of low deposit lending on apartments - the most affordable properties for first home buyers.”
Of the industry player Newsroom spoke to, Hamilton-based mortgage advisor Jeff Kerwin of Nest Home Loans is the most positive about Megan Woods’ Budget 2022 announcement.
Kerwin would like to see more tweaks to the grants, and can’t see the point of having salary caps, but he reckons lifting house price caps for First Home Grants in Hamilton from $535,000 to $650,000 for existing properties and from $600,000 to $725,000 for new builds, as well as removing the caps for loans, will see many more of the people he sees eligible for the scheme.
“Last year we did virtually no [First Home Loans or Grants] in Hamilton and just a handful further out, where prices are cheaper,” Kerwin says. “Lots of people asked, but we had to say we couldn’t help them.
“This could put hundreds of our clients into this category.”
Let’s hope so, says Lesley Harris.
“It’s definitely better than nothing, but we have to continue the journey to see what the obstacles are, to understand what individual banks’ criteria are and how hard it is to get the lending.
The jury is still out, she says, about whether the Budget announcement will produce a material change and the Government should do more to get more wannabe first home buyers into their own place.
“We’ve seen a couple of tweaks, but to really make a difference, we need a much more holistic approach.”
