Buyers of delayed new house builds risk losing deposits because of tougher lending laws, brokers claim

Friday, 17 December 2021

Lawyers say sunset clauses to cancel contracts with new build house buyers are being invoked more.

Mortgage brokers are reporting nervous times for people who have paid deposits on homes that are yet to be completed.

That was because some faced having to reapply for their bank loans, and if they were turned down, they could lose their deposits, brokers said.

People buying a home off the plan paid a deposit to developers after getting loans approved from banks, but those approvals had expiry dates, after which they had to be reapplied for.

Brokers said ordinarily, that would not be a problem but new tougher lending laws which came in on December 1, and rising interest rates, meant some people were in danger of having their applications turned down by banks.

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Auckland mortgage adviser Karen Tatterson said she had clients in that position.

In some cases Auckland building delays have been caused by restrictions imposed by the Government in the fight against Covid, Tatterson said.

Once a buyer went unconditional on the purchase of a new build home, if they could not complete the deal by securing finance, they stood to lose their deposit, she said.

Tatterson said she had spoken with a bank about one of her worried clients.

The bank said they had a “moral obligation to honour” those deals, she said.

Mortgage broker John Bolton has launched a petition at Change.org seeking to get new lending laws reviewed.

BNZ and Kiwibank indicated they would honour such “in-flight” deals, but the picture was less clear at other banks, she said

“I can see a lot of people who won’t qualify under the new policies, but because the bank has approved it, and a deposit has been paid on that basis, the bank will have to honour the deal.”

“Imagine the situation where a young couple paid a $65,000 deposit, and then they went back to the bank, and the bank said no, and they had to walk away and lose their deposit. There would be an uproar,” Tatterson said.

The new lending laws, designed to prevent lending to “vulnerable” people by unscrupulous lenders, have been criticised by brokers for ushering in ultra-conservatism in the banks, and has led to John Bolton, chief executive of mortgage broker Squirrel starting a petition to have the new laws changed.

But while there have been claims that isleading to banks declining loan applications, data to prove the claims has not yet emerged, and the law change has coincided with the Reserve Bank of New Zealand Te Pūtea Matua imposing limits on low equity loans by banks.

The introduction of the new lending laws has also coincided with a rise in home loan interest rates, and the higher “test” rates that banks use to calculate affordability for borrowers.

Banks typically set time limits on loan approvals for people buying homes off the plan, which are yet to be completed.

That meant people might find the bank was willing to lend them less than when it first approved a loan for them to buy off the plan, Tatterson said.

Mortgage broker Campbell Hastie said there was risk in buying uncompleted homes from developers, because the loan approvals lasted for a maximum of 12 months, and developments often took longer than buyers expected.

“Most people who sign up for an off-the-plan build are taking a bit of a punt in that regard,” Hastie said.

A lot could change in 12 months which could change the likelihood of a bank re-approving a loan, he said.

People’s incomes could fall, or they could become pregnant. Or the lending laws could be tightened up.

“It just so happens in the last four months, there’s been a lot of change. It’s really come home for some people,” he said.

An ANZ spokeswoman said as a general rule a customer with an approval would not need to go through the re-application process unless there was a material change to the terms of the approval, such as an increase in loan amount or the approval had expired.

“If there was a material change to the terms of the approval – for example, an increase in loan amount due to a rise in building costs – we would reassess the application,” she said.

The bank advised everyone to seek legal advice before entering into an agreement on a new build, she said.

A Westpac NZ spokesman said if a borrower’s pre-approved loan for a new build was not drawn down within a certain period, the bank must carry out a new assessment.

The bank would work with customers who had already paid a deposit on a case-by-case basis to consider the options, he said.

A BNZ spokesman said once a customer had gone unconditional on a turnkey property and paid the deposit, the bank would honour the loan regardless of whether the build took longer than 12 months.

“In situations where the customer’s circumstances have changed significantly during the build, we work with the customer on an appropriate solution,” he said.

A Kiwibank spokesman said it would only reassess the situation if a customer’s financial situation changed.