First timers may suffer under loan rules

Northland first-home buyers could find the struggle to own the roof over their heads getting even tougher next month, when Reserve Bank plans to limit home loans could drive people with low deposits into the clutches of loan sharks.

The Reserve Bank aims to reduce pressure on the overheating property market by limiting the amount of loans that banks can give to borrowers with deposits of less than 20 per cent.

Banks have been told to prepare for the loan restrictions and parliamentary sources have indicated the change could take effect in August.

It would mean someone looking to buy a house for Northland's present average asking price of $388,790 would need a 20 per cent deposit of $77,758 - a big jump from the 5 per cent deposit of $19,439 that could now get them the front door key.

Financial Services Federation executive director Lyn McMorran has warned of a return to the days when cowboy finance companies and solicitor's loans were commonplace.

"In the bad old days, you'd pay horrendous interest rates on second mortgages," she said. "That'll happen again."

Ms McMorran predicted dodgy finance companies like those which had collapsed in the global financial crisis could return to the market.

Prime Minister John Key this week told the Local Government New Zealand conference in Hamilton that first-home buyers remained "a priority" for the Government but "all tools have to be considered" in balancing their needs with the Reserve Bank's likely restrictions on home lending for buyers with small deposits.

He backed the Reserve Bank's concern about the emerging housing bubble.

And he stopped short of endorsing earlier suggestions by Housing Minister Nick Smith that one way to assist first-home buyers would be to give them greater access to funds in their KiwiSaver accounts.

Reserve Bank discussion documents show it is hoping the higher cost of non-bank loans will turn people away from "opportunistic lending".

Reserve Bank Deputy Governor Grant Spencer said recently that the most obvious way for first-home buyers to top up their deposit would be to hit up mum and dad or other relatives.

Bankers' Association chief executive Kirk Hope said it was likely buyers would turn to sources other than banks for the increased deposits. "In Canada and Sweden that's exactly what happened," he said.