Borrowers bare all for banks

Banks watch closely how you spend your money. Photo / Herald on Sunday

Nosy parker banks will trawl through your private life before they will lend to home buyers needing more than 80 per cent finance.

"Are you always at cafes, pubs or casinos?" asks mortgage broker Kim Lyons of Be Mortgage Free.

If so, he says: "In today's Eftpos market, they can track you from the minute you leave work on a Friday until you come back on Monday."

Lyons says banks do it to check out how you live. For example, if you clear your credit card monthly, it shows you are living within your means. But if it is always at or near the limit, then it shows you are living beyond your means.

Banks have relaxed the purse strings, with ANZ lending up to 90 per cent of a home's value again and Kiwibank and BNZ up to 95 per cent. But when borrowers apply for more than 80 per cent finance, lenders will check their bank statements to see how they manage their accounts and what they spend money on.

Banks want to see a borrower's savings history - it is no good depositing a large sum into your account right before you want to buy a house.

The good news is banks now have a better attitude towards existing customers with a track record, Lyons says, unlike previously when borrowers got a better deal by leaving their bank for another because the market was so hungry for business.

Reserve Bank Governor Alan Bollard is worried about banks easing their lending criteria, saying in the bank's latest report: "We would encourage the banks to avoid any return to riskier mortgage lending practices."

He is concerned borrowers could be caught by increased repayments as interest rates rise next year from current low levels.

If rates have risen from 7 per cent to 9 per cent when today's borrowers come off the favoured two-year fixed mortgage term, they will face a 25 per cent increase in mortgage costs.

But Westpac economists say today's buyers are getting an opportunity to take up cheap financing.

House prices are historically still high, underpinned by listings shortages and increased demand, but it is worth paying a bit extra for a house to get it now, while interest rates are low, says Dominick Stephens, research economist at Westpac.

Today's one-year fixed mortgage rate is 6 per cent, compared to the historical average of 8 per cent.

So buying today and taking a one-year fixed mortgage would save 2 per cent of the house's value in interest costs.

Stephens advises housing market sceptics to stand aside for a while.

"This market has a head of steam on it, and prices are heading higher. If inflation rises above 3 per cent on average, buying a house now could turn out to be the best financial decision you ever made."

Lyons says most buyers have deposits of less than 20 per cent of the house price, so should talk to their lender or broker before signing a purchase agreement to ensure they're going to get finance.

Getting finance pre-approved before you house hunt can save time.

Expect banks to take 7 to 10 working days to approve agreements conditional on finance.

Buying in today's market

* Banks require moreproof you are responsiblewith your money, such as evidence of savings in a bank account for at least three months. They will want to know where a lump sum deposit came from.

* Bank statements are scrutinised for dishonour fees and regular unarranged overdrafts, which show you don't manage finances well. How much do you fritter away at bars and cafes?

* Clear your credit cards monthly—this shows you live within your means.

* Commission, overtime and bonus payments need to be documented. Tax summaries are often required. The bank will look at how your income
is tracking in the current financial year.

* You should have minimal hire purchase and car loans.

* Banks do not like credit issues. If you have had a bad debt, make sure it is paid and you write a letter explaining how it came about.

* Banks are selective about properties they will lend on.
Mortgage broker Kim Lyons says they may want to see a builder's report. 'If it indicates the property is a doup, they may turn you down, because of uncertainty about what it will get at a mortgagee sale.'