Disclaimer:
The information on this website is for general guidance only and does not constitute financial or investment advice. Always do your own research and seek personalised advice from a qualified financial adviser or mortgage adviser before making financial decisions. All investments carry risk and past performance is not indicative of future results.
Key Takeaways
- Servicing tests use higher rates than your actual mortgage rate.
- Income, debt, and expenses drive approval decisions.
- High debt reduces borrowing capacity quickly.
- Lower credit limits can improve assessed surplus.
- Adviser input can help explain policy changes and lender criteria.
Do You Pass The Debt Servicing Test?
Borrowing at the moment isn't easy and a lot of this comes down to bank credit policy in this market and their appetite to lend. Credit policy varies across banks, however, in most respects, they remain very similar. This article helps to explain the importance of debt servicing when applying for your first home loan.
Debt Servicing Test Rates
A debt servicing test is a calculation to assess whether your financial situation would stand up to changes in situation during the term of your home loan. This could be increased home loan rates, a change in employment or something else that could impact your ability to maintain your loan payments.
Important: Servicing test rates are set by lenders and can be higher than the advertised mortgage rate. The exact rate and allowance used can change by lender and over time. At a high level, lenders use servicing assumptions along with expense and living-cost allowances to assess fixed outgoings and borrowing capacity.
Borrowing Potential
Under current RBNZ DTI settings, borrowing above 6 times gross income for an owner-occupied home is treated as high-DTI lending. Banks have limited capacity for that lending, and RBNZ also notes that banks apply other lending rules and their own affordability assessments before deciding whether, and how much, to lend.
In recent times, credit policy has been more broadly dictated by Reserve Bank Loan To Value Restrictions (LVR) and responsible lending codes. Responsible lending obligations require lenders to make enquiries and assess affordability, but each lender still applies its own policy and assessment process.
Variations in bank interpretation of these rules allow lenders to separate themselves from each other in small ways. Lenders may cluster around similar settings at times, but lender appetite, servicing rates, expenses, credit policy, and exemptions can still change the outcome.
New Build Exemption From LVR Restrictions
RBNZ lists construction loans and purchases of newly built homes from the developer within 6 months of completion as exemptions from DTI/LVR restrictions. That can give lenders more room, but lower-deposit approval is not automatic and depends on lender, property, contract, deposit, and servicing criteria.
With bank policy changing over time, an adviser can help compare lender criteria, explain policy changes, and prepare a clearer application, but approval still depends on lender assessment and your circumstances.
Need personalised guidance?
Chat with a First Home Buyers Club affiliated mortgage adviser - no obligation!
Have a question about this?
Post it in the First Home Buyers Club forum — get answers from the community and industry professionals.
What Can Be Done To Improve Your Approval Chances?
Getting a home loan approval is now not simply about how much deposit you can get together but your ability to service or maintain the mortgage payments. Therefore one's income, current debt levels and outgoing expenses are increasingly important in helping you get the 'Yes' from your lender.
1. Reduce Your Debt
Debt can be a major handbrake on borrowing potential. As an industry rule-of-thumb example, around $10,000 of debt can materially reduce borrowing capacity, but the exact impact varies by lender, interest rate, term, and debt type.
2. Manage Your Expenses Where Possible
Lenders assess applicants' expenses to understand whether proposed borrowing may put them in a financially stretched position. Even as credit-law settings and lender policies change, expenses remain relevant to affordability assessments.
3. Maintain a Monthly Surplus
When determining what borrowing a client may reasonably be expected to afford, lenders may look for monthly surplus after income, expenses confirmed from bank statements, and proposed home loan payments using the lender's servicing assumptions. Maintaining a consistent monthly surplus can help show a lender that the proposed repayments may be manageable, with some room for unexpected costs.
Have a first-home-buyer question?
Browse related forum discussions
Public forum questions are searchable, with answer previews for visitors and full discussions for free members.
Frequently Asked Questions
Need personalised guidance?
Chat with a First Home Buyers Club affiliated mortgage adviser - no obligation!
Have a question about this?
Post it in the First Home Buyers Club forum — get answers from the community and industry professionals.
Related Articles
A First Home Buyer's Guide to Real Estate Terms and Sale Methods in New Zealand
Essential guide to understanding real estate terms, sale methods, and property jargon for first-home buyers in New Zealand. Learn about auctions, deadline sales, and more.
Buying a Monolithic or Plaster Home in New Zealand: What First Home Buyers Should Know
Essential guide for first-home buyers considering monolithic or plaster homes in New Zealand. Learn about weathertightness, inspections, insurance, and legal protections.
How to Secure a New Build with a 5% Deposit
Learn how first-home buyers can secure a new build in Auckland with just 5% deposit using the First Home Loan scheme and KiwiSaver.
How to Supercharge Your First Home Deposit in New Zealand
Learn proven strategies to accelerate your savings and reach your deposit goal faster with KiwiSaver and smart saving techniques.