Diana Clement: Beware of mortgage fish hooks

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Taking out a mortgage is a rite of passage for Kiwis. Some, however, are stopped in their tracks because the bank says no to lending them money. The reasons for that take some people by surprise.

Buyers who have previously had no trouble getting a mortgage sometimes find that their lender doesn't want to touch them now because they have changed their criteria, which they do regularly.

Or, if you want to top up your loan, the bank sometimes says no and buyers find they wouldn't qualify for the same mortgage had they applied now, says Sue Tierney, mortgage broker at Sue Tierney Mortgages. Two recent clients of Tierney's who found they couldn't borrow money were both property investors.

In the lead up to the new Healthy Homes Standards, property investors are finding it hard to borrow money to insulate their homes. From July 1, all rental properties will require the right ceiling and underfloor insulation.

"Many who want to extend their mortgage to pay for this work are being turned away by banks because their debt levels are too high," says Tierney.

First-time buyers can get caught out with their plans to use KiwiSaver to buy a home. It cannot be used for the initial deposit on contract, says Jeff Royle, mortgage broker at iLender. It's paid on settlement day.

Some borrowers think they can outsmart the bank to get around the rules, says Royle.

He tells the story of a woman working for Bunnings Warehouse who provided payslips and bank statements declaring her income.

"Both were doctored to show her income to be higher than it was and this was picked up on an audit call by the bank to the employer."

Needless to say the bank didn't want a bar of her.

Another client moving to the South Island told the bank she had job offers.

"Turned out, yes, the home buyer had been interviewed for jobs, twice, but, no, neither employer had made an offer," Royle says.

When it comes to insurance, if you're caught telling lies, your name will be flagged on the Insurance Claims Register and it may be virtually impossible to get cover again. And banks won't lend to you if you can't insure the house. It's no good trying to insure in your partner's name because if you own the house jointly you have to declare that.

Going freelance or taking a break between jobs can be disastrous if you want to get a mortgage, says Tierney. Banks have to adhere to the Responsible Lending Code and can't lend to people who don't have an income.

Westpac bank is facing a class action in Australia from customers who say the bank lent to them irresponsibly, says Tierney. This type of client is the sort of person who goes to bank after bank and then through mortgage brokers trying to get around responsible lending rules.

Being too clever with your self-employed income can also prove troublesome when you apply for a mortgage. Your accountant will charge all sorts of "expenses" to your business to reduce your income on paper so you pay less tax, says Tierney. The problem is that you can only get a mortgage based on that figure.

I thought I'd heard all the mortgage fish-hooks in existence until Stuart Wills, mortgage broker at the Mortgage Supply Company, drew new dots for me around the age-old guarantor problem. Maybe you have guaranteed $100,000 of your child's home loan. Your mortgage broker and/or lawyer negotiated with the bank to ensure your liability was limited to that figure instead of the more standard guarantee of everything your children borrow now and in the future.

Should you sign a car loan or overdraft with the bank in your name, it's likely that the new documentation will be all encompassing and overrule your agreement about the kids' loan.

Banks' documentation works like that. When the kids default years down the track you're hit with their mortgage, business and consumer debt.

Avoiding surprises comes down to planning, says Tierney. If you are thinking ahead you will know how to qualify for the KiwiSaver HomeStart grant, or that you need to get your mortgage before you leave your job not after, or that banks are more conservative than the last time you signed on the dotted line.