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Why can't I borrow as much as I want from the banks?

If you're in the market for a home loan, you might be surprised to find out that currently, the amount you can borrow from the banks is less than what you had in mind. There are several factors that contribute to this, but one of the main ones is the test servicing rate.

The test servicing rate is the interest rate that banks use to assess whether you can afford to repay a mortgage, based on your income, expenses, and other debts. The Reserve Bank of New Zealand requires banks to use a higher test servicing rate than the rates you might see advertised and most banks are using a rate around 8.5% as of May 2023. This is to ensure that you can still afford your mortgage repayments even if interest rates rise in the future.

It makes sense for the banks to do this as it creates a buffer for borrowers but it can be a shock for borrowers when they know they can afford repayments at current rates.

Another factor that affects your borrowing power is the cost of living. As we all know, the cost of living in New Zealand has been rising significantly over the last 12 - 18 months, with increases in housing, food, energy, and other expenses. The banks have all increased their base level of expenses for these fixed expenses.

However, it is not all doom and gloom!

So, what can you do if you can't borrow as much as you want from the banks? The key is to focus on two things: cutting expenses and increasing income.

Cutting expenses might involve some tough choices, such as reducing your discretionary spending and finding ways to save on bills and groceries. It may also mean giving up on every streaming platform! However, every dollar you save can help you reach your goal of homeownership faster. You can also consider refinancing your existing debts to get a lower interest rate or consolidating them into a single loan to simplify your repayments. The banks generally need to see 3 months of reduced expenses or confirmation of the expense being stopped.

Increasing income can be challenging, but there are several ways to do it. You can ask for a pay rise at work or look for a higher-paying job and with the current job market, this is possible. Just remember that the cost of living we noted above is affecting businesses as well! You can also consider renting out a spare room or taking in boarders to generate extra income. If you have the spare rooms the bank will let us include 2 boarders, paying between $200 - $250/week each depending on the bank. That can make a massive difference.  If you own an investment property, you can raise the rent or consider selling it to free up equity for your new home if that's the best option.

Ultimately, the key to borrowing as much as you need is to work with a mortgage advisor who understands your situation and can help you find the best loan for your needs. At My Mortgage, we can guide you through the application process and help you understand the test servicing rate, and how it affects your borrowing power, and we'll work with you to find solutions that fit your budget and goals.

In summary, borrowing money for a home can be a challenge, but with the right strategies and support, you can make your dream a reality. So, take a close look at your expenses and income, and reach out to us at My Mortgage to see how we can help.


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