Equity loss leaves many borrowers locked with current banks
Many recent first-home buyers are stuck with their current lenders, mortgage advisers say.
While falling house prices have opened doors for some new entrants, those who bought before the downturn – or at its early stages – have seen their equity reduced significantly.
That is not necessarily a problem if borrowers can service their loans, but it often means they cannot switch to another lender. This comes at a time when banks are competing aggressively for new customers, offering cashback incentives worth thousands of dollars.
Squirrel chief executive David Cunningham (pictured left) said the issue was particularly acute in Auckland and Wellington, RNZ reported.
"If you're in the cohort of people who bought their house with a high or even 80% loan to value ratio, and prices have fallen up to 25%, you're potentially in negative equity and it can be quite frustrating, if you would like to refinance. You're stuck, you can't refinance," Cunningham said. "Gradually, over time, it will resolve itself, but here and now, it's a barrier to that group of people."
Patience needed as equity rebuilds
Loan Market mortgage adviser Bruce Patten (pictured centre) agreed the problem was widespread, particularly for those who purchased near the peak.
"A good example would be if you paid $1 million in mid-2021 and you borrowed $900,000," Patten told the publication. "The property values, on average, have dropped somewhere between 8-15%, so your equity is gone.
"If you've got negative equity, the market will take care of itself in time, but you just have to stay put. If you bide your time, in the next three years, you'll be back to a position where you will be able to move, but the last thing you want to do – unless you can't afford it – is to sell your house and be out of the market, because you bought at a peak and you're selling at a low.There is a lot, particularly first-home buyers."
Refinancing options still available in some cases
Despite the challenges, refinancing is possible for some borrowers, according to Key Mortgages adviser Jeremy Andrews (pictured right).
"Common reasons might be that your current lender is charging higher interest rates, has unfavourable loan terms or if you initially had to use a second-tier lender, due to a poor credit rating," Andrews said.
He noted that the Reserve Bank allows exemptions to loan-to-value restrictions for “dollar-for-dollar” refinancing, where the loan amount does not increase.
"This helps prevents people being locked in with their current lender. In some cases, a main bank may even offer a cashback to refinance a high-LVR loan," Andrews said. "A mortgage adviser can help assess your situation to see if refinancing works in your favour, plus which banks can work best."
Opportunities emerging for new buyers
While some recent first-home buyers remain trapped in negative equity, others are finding improved conditions. LJ Hooker head of research Mathew Tiller said deposits are stretching further and listings are higher, giving buyers their “best shot in years.”
“Prices continue to drift and that’s given first-home buyers their best shot in years. Sales softened in August, and listings lifted into spring, so buyers with finance sorted now have more choice, more time, and a little more leverage,” Tiller said.
Cotality NZ data shows first-home buyers’ share of purchases lifted to 27.5% across July and August, supported by small value declines and an easing bias from the Reserve Bank.
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