Understanding Home Loan Calculations in New Zealand

Welcome to the Advanced Mortgage Solutions Podcast!   

In this Episode, host Joel Sadler is joined by mortgage expert Scott Miller, owner and founder of Advanced Mortgage Solutions. 

Scott, a seasoned property investor with over 20 years of experience, breaks down what banks look for when calculating home loans. 

They discuss the importance of accurate and truthful financial disclosure, how banks assess loan applications under the responsible lending code of 2017, and the differences between renting and mortgage payments. 

Scott also delves into the nuances of refinancing and provides essential tips for prospective home buyers, like managing consumer debt and adjusting KiwiSaver contributions to improve cash flow. 

Don't miss this informative episode packed with insights to help you on your property journey.

00:00 Welcome to the Advanced Mortgage Solutions Podcast
00:36 Understanding Bank Calculations for Home Loans
02:07 The Responsible Lending Code and Its Impact
04:49 Refixing and Rolling Over Mortgages
07:48 Relocating and Mortgage Considerations
09:25 Detailed Mortgage Application Process
13:33 Tips for a Successful Mortgage Application
16:33 Final Thoughts and Conclusion

For assistance with a new or existing home loan, reach out to Advanced Mortgage Solutions today. www.advancedmortgagesolutions.co.nz 

Transcript

SPEAKER_00 0:07

Hi everyone, welcome to the Advanced Mortgage Solutions Podcast. This is a podcast that assists people on their property journey. Whether you're a first-time buyer or a seasoned investor, we cover all topics. I'm Joel Sedler and our mortgage expert today is Scott Miller, owner and founder of Advanced Mortgage Solutions. Scott's been a property investor for over 20 years serving Canterbury-Wide and has an amazing professional background in logistics, management, finance and obviously real estate investing and mortgage advising. In today's episode, Scott's going to talk about what banks look for when making calculations for home loans. When you're applying to the bank for a home loan, how do you know how much you're going to get? How do you know how much you're going to have to pay back? There's all these calculations that take place in the back end. So, Scott, tell us a little bit about how that all works and what people can expect through that journey.

SPEAKER_01 1:00

It's a great subject because if you if you jump online and find some of the calculators, you know, put in exactly the same details or amounts and deposit, and you come up with hundreds of thousands of dollars difference. So, you know, that's certainly not how an application for finance is assessed. We've streamlined that process and now have a digital platform that we can send out to people. Um they can fill it in on their phones or on their computers or, you know, on their tablets. It doesn't really matter. Um and the last page, there's a big submit button and it emails it directly to me. I can crunch some numbers on actual bank calculators that the assessors at the banks use. So we know what we're putting in is what the eventual application would be seen like. Um and then we can have either a Zoom call or a Teams call or whatever, or even a meeting at the office, um, just to go over those numbers. Um I suppose, especially for first-time buyers, you know, the the the biggest misconception will be look, I can afford $500 a week in rent, so I can afford to pay $500 a week in a mortgage. Um the problem with that is that the way that the banks assess an application are under the guidelines set out in the Responsible Lending Code of 2017. I know this is sounding all official, but I'm gonna get to a point. And that is that the first point of that um law that came in is as a lender, you are not allowed to put an applicant into a position of financial hardship, full stop. Right, is number one. And so uh several laws before that law came in and and and sort of it was thwarted and tested to see how much they could get away with. But uh let's just say some of the banks that uh may have used the same criteria had as they had been certainly very quickly learned that this new law had teeth. Um, and the banks were very much held accountable through fines and the like if they were finding they were putting people um accidentally or or on purposely unlikely um into a position of financial hardship. And where I'm leading to that is that the $500 example doesn't really work because what you're finding is uh here goes how much it would actually cost to repay your mortgage, but the banks are assessing way up here to ensure that there's no chance of putting that particular applicant into a position of financial hardship. So what it means is the assessment process is way harder than what you're actually really going to end up in the real world, but you have to pass the sort of assessment process to get to the real world. And that's where there's that misconception out there on hey, I can afford it in rent, so I can afford it in mortgage, the actual real world. Yes, that is quite possibly the case, but it's not the way that the banks are assessing because of the the laws that govern how they can make an assessment.

SPEAKER_00 3:48

Right. And and does that relate, you know, that sort of buffer above the $500 that they take into account? Does that account for, say, things like interest rate increases? 100%. Or or yeah, right.

SPEAKER_01 3:59

So look, look, look, what we know today, October 2025, we're enjoying one year rate at the 4.5 mark, you know. Um in in three years' time, it is very unlikely that it will be 4.5. You know, we might be in a five or a six in front of it by then. So the banks have to say, hey, look, we know that rates are really good today, but we've got to assess with half a mind in the future to make sure that we're, again, not putting these applicants into a position of unaffordability through interest rates going up. And so they're doing the responsible thing by making the assessments harder than what they need to be. I suppose the kicker to that is, yes, the protection's in place, but it does make it harder to get a loan. Yeah. Yeah.

SPEAKER_00 4:42

And tell me, tell me, so that's the you know, sort of first home buyer model or buying house outright. If you're coming to the end of a term, you know, is this have an existing mortgage? That's obviously really important to talk to you about refixing and all that sort of thing. Does the bank reassess all of the factors like your income, has your income changed, all that sort of thing, or is it literally just sort of roll over? Like what's the process of refixing a mortgage?

SPEAKER_01 5:08

Yeah, so refixing, also called a rollover. So you roll over from one rate to another rate. Look, if you haven't given the bank a reason to contact you, um, then it's a simple chance of picking a new rate. There's no reassessment, there's no, you know, anything like that. Look, if you've got behind in your payments or you've missed some ponents and and the banks are concerned that maybe you're finding things tough, um, then there might be a reassessment at that chart at that stage just to say, hey, you know, we really um are looking to be responsible here. We need to know that your financial health is where it needs to be. Um so we're going to do that reassessment. So that that's a relatively scary little moment, you know. So the idea is um if at all possible is to not miss mortgage payments or give the banks a reason to give you a call, um, because then it definitely eases the process of rolling over to something else. After saying if you are finding things hard, you know, the banks have areas that were in the bank for hardship and all those sorts of things. Um and by all means go and contact them for that um kind of relief if it's required. Yeah, 100%.

SPEAKER_00 6:12

Yeah. Yeah, right. Interesting. I think we might do a podcast um episode on that, on hardship and just some of the you know things that people can do. We talked about um there's that buffer there when the banks calculate your ability to service a loan. Is there also an element they're trying to avoid risk to themselves as well of people defaulting on mortgages and that whole sort of process?

SPEAKER_01 6:36

Uh a bank's a business, right? They want to make sure that uh you know they're being paid um for the the business and and and and products and services that they provide. Uh and and delinquencies or or or slow payments and things like that, you know, uh they're not things that any business model would go out and objectively try to strive for. So yeah, no, there is um some self-serving in there as well, of course, from the business model. Um, but a lot of the changes around how the um loan assessment is done is through regulation. Um it's all there to protect the uh the end user, you know, the mortgage holder. Yeah. Um, but like I say, that protection comes with the caveat that it just makes it a little bit harder and than it used to be to get finance, and for good reason. You know, if you look at the global financial crisis, for example, that's a perfect reason that things were a little bit too relaxed at that stage. Um, and money was, you know, have you got a pulse, we'll give you some money. Uh uh was yeah. I'm exaggerating for effect, of course, but uh, you know, it it's not like that anymore. Yeah.

SPEAKER_00 7:39

Yeah, yeah, that makes sense. Um, so changing tact a little bit, you mentioned um earlier about you know people moving city or relocating, yeah. There's some nuances to that part.

SPEAKER_01 7:51

Can you give us a bit of an overview? It really is. So on that responsible, you know, and we're coming back to that responsible thing, the member has to understand ongoing affordability. So if you're a moving city, say, you know, coming from Auckland where higher house prices that just aren't achievable, and coming down south to Christchurch, which is a big movement of people doing that, the lender needs to understand that they've secured employment in Christchurch. Because if they move to Christchurch, it's a little bit too far usually to uh transition to Auckland on a daily basis to go to work. You know, and then there's extra costs involved in that that we'd have to declare as part of an application, and you know, then there's the inconvenience side of it as well. So, you know, the lender would very much be asking questions like, okay, show us um confirmation through, you know, a transfer of your existing job to the same employer but in Christchurch. Or, you know, a new um a new employment contract with a new employer, but it's Christchurch base. Or if you have a, you know, uh a work from home opportunity, uh, get a letter from your employer saying that by moving to Christchurch, this doesn't change um the type of job or income that you have been receiving when you do move to Christchurch. And then the the banks can certainly get back on to the assessment process knowing that when they've moved here, the ongoing affordability pieces have been ticked off and we're all good to go. So yeah.

SPEAKER_00 9:16

Yeah.

SPEAKER_01 9:17

Yeah.

SPEAKER_00 9:17

Okay, interesting. And then tell us a little bit of a breakdown around things like um, I remember when I worked through the mortgage process thing, questions like um how many kids do you have, how many vehicles do you own? Do you have any credit cards and that type of thing? You know, are those questions I imagine they're still all relevant.

SPEAKER_01 9:34

Um look, uh I um just came across uh uh an application that I did in 2006. It was just last week. And the application was eight pages long. Today it's 37 pages long to do exactly the same thing. So uh the need for information and to make sure they're not putting the applicant into a position of financial hardship has certainly increased the amount of information that a lender needs to know. And then also it needs to be backed up with you know, wage slips or uh uh loan statements if you've got a car loan or a phone loan or a you know a loan of any type, a student loan, for example. So uh the makeup of the family's important. So how many applicants that are working and how many dependents, you know, if you're working full-time, did the dependents need child care? You know, they'll thought everything through now. So um, you know, uh is one of the uh applicants pregnant? Well, we we you know we know now how long that's gonna take until there's a little bundle of joy uh joining our world, and that changes the outcome of a of an application. Um so we have to, you know, support, bring more supporting documentation around uh how are we going to afford things on one wage for a while. So yeah, look, um it's a really good point to make, and and that's again, you won't find that detail on an online calculator. You won't find that kind of detail um in AI or or Google. It's just too it's too narrow uh a field of information for that to be accurate. So again, go to a financial advisor, a specialist in that area to take you through that process.

SPEAKER_00 11:14

Yeah, we've we found that my wife and I and we purchased a property in Auckland after we got married, and um and she became pregnant. I thought she might have been actually she was pregnant, and we had to disclose that detail. You've sort of touched on it.

SPEAKER_01 11:29

One thing I would strongly suggest is declare the truth. Don't don't omit information because you think it will change the outcome, because non-declaration of facts and figures is something that banks very, very much frown upon. And of course, if if they find one thing, now they're gonna get a magnifying glass out on every part of that application to make sure that there's nothing else that's been omitted. Now, sometimes it's accidental. Oh I forgot my my my phone's on uh I'm still paying it off, it's on a loan. That's a that's a very common thing to forget because it's just part of your your phone bill, right? You forgot what it's like. You haven't paid it completely off. Um so there's that that's that's the kind of accident that okay, we'll wear that, you know. But you really don't accidentally not know that you're pregnant. Especially later on. And you know, if you change it.

SPEAKER_00 12:27

And then that income's gonna stop soon. Yeah, well that's right.

SPEAKER_01 12:29

And you turn up a branch to sign your loan box and you know, and and it's quite uh obvious that you're pregnant, and then they look and say, but there's no declaration of pregnancy, then you know that that has some effects. Um yeah.

SPEAKER_00 12:40

Yeah, yeah. Interesting. Yeah. Okay. Was there anything else you can think of that you want to cover off, Scott, and this part around how loans are calculated and any other tips?

SPEAKER_01 12:50

Oh, obviously there's some there's some simplish tips, right? You know, keep consumer spending or consumer debt to the minimum. And what I mean by that is don't go out and get massive credit card limits because banks work off limits, not off balances. You know, try and stay away, if you can, from afterpays and zips and all of that sort of pay buy now, pay later kind of thing. Um when you're coming up to uh the time that you're really interested in and making an application for pre-approval, you know, you might to decrease your Kiwi Saver level from 10% to 3% so it puts a bit more money back into your wallet, and then that can be used as part of the assessment process. So the more common sense things that what would I do if people were going to come to me for hundreds of thousands of dollars? Well, that's pretty much what the bank's gonna ask you for to make sure that the picture is what you're telling them. So yeah, just a common sense approach to that. Um, if you have got the time and and you know the the four sort of thought of uh approaching your financial advisor to get pre-approved, knowing that that pre-approval would usually last for six months, then you know it gives you that chance to go and do some numbers in behind the scenes before you tell your story to the bank. So if there's any things that we need to work on, we can work on them um before we're actually uh making that application to the bank.

SPEAKER_00 14:12

That's interesting. And and I just want to circle a little bit round on that Kiwi Saver thing. So you mentioned, for example, to increase the cash flow, which the bank will take into account, your your income is to reduce your KiwiSaver from say five, what's it say five percent to three percent or whatever it might be? I mean you can do at the moment, and so if you're running at 10, you can drop it back down. So is that something, you know, when someone has a first discussion, like I say, I'm talking with you in your office today or over Zoom about that, and we might be I might go, well, I'm maxed out with my income, and you go, Well, we're really close. What you know, I could see that your Kiwi saved at 10%.

SPEAKER_01 14:46

Would you suggest those little options to people to kind of meet things today already, and every one of them it was around, hey, you're tied, but decreasing the percentage that you go and put towards your KiwiSaver, it brings us back some breeding space. Uh, you know, and look, it's it's the years and years and years that you've had your KiwiSaver, you know, trembling away in the background to build that um first home buyer deposit, you know, by putting it down to three percent a couple of months or even six months, if it takes you six months to to find a house and eventually buy it. Um it's not gonna make a massive difference to how much you've saved through the KiwiSaver by reducing it to three percent for several months. You know, you've done the hard yards already in most instances. So reducing the KiwiSaver contribution just before you're looking to buy a house is a very, very common thing to do.

SPEAKER_00 15:36

100%. It's a bit of gold there, yeah. Awesome. All right, Scott, thanks for today. Really appreciate the insights, and um, yeah, we'll see you on the next episode. Thank you very much. Bye.