Interest rates might be dropping, but borrowers still need to prove they can pay back their loans at more than 8% at New Zealand’s main banks.
On Monday, two-year fixed special rates were advertised at either 5.69% or 5.79%.
But the banks confirmed that the rates they use to test borrowers’ applications against remain over 8%. This is designed to ensure that borrowers can afford to pay back their loans, even if interest rates rise.
Westpac said its test rate was 8.15%
ANZ said its test rate would drop from 8.5% to 8.05% on October 15.
BNZ said its rate was 8.5% but it regularly evaluated it to ensure lending was appropriate and delivering the right outcomes for clients.
Kiwibank said its rate was 8%.
Mortgage broker Karen Tatterson, of Loan Market, said a drop in the test rate from 8.75% to 8.15% would potentially increase how much someone could borrow by $50,000 to $70,000, depending on their circumstances.
Another broker, Jeremy Andrews of Key Mortgages, said test rates had peaked near 9%, and the drop was making servicing calculations much easier for buyers.
“Minimum wages and many incomes have increased over recent years at faster rates than many can remember in New Zealand.
“This, combined with the expectation of the OCR and international interest rates continuing falling notably over the next year or so, will continue to have a big increase in borrower buying power.”
But he said he expected debt-to-income ratios could be a handbrake for some buyers. These limit the total amount of debt a household can have to six times their annual income.
“This will start to have an impact on limiting borrowing as test rates drop further. Investors can have up to seven times, so further test rate falls will continue to have more allowance to increase their borrowing power.
“This might encourage some home owners to dip their toes into an investment property if they were previously sitting on the fence.”
