Independent home buyers face even higher interest rates, mortgage advisers say
Kayleen and Nick Grimstrup thought they had found their dream home, but due to her self-employment income being classified as “risky”, they could only get second-tier loans and a floating interest rate of 10. %.
Buying a home can be trickier for the self-employed first buyers – with mortgage advisers warning that higher interest rates could make repayments harder to bear.
Kayleen and Nick Grimstrup thought they had found their dream home – a four-bedroom house in the Upper Hutt suburb of Clouston Park. Initially listed at nearly $1 million, the price fell to $725,000 during the decline in real estate prices.
This meant that the couple were also qualified for a grant for the first Kāinga Ora house – $10,000 in their case – after the program’s price cap for Wellington’s existing homes was increased earlier this year from $650,000 to $750,000.
These converging forces left the Grimstrups with a 13% healthier deposit than expected. But their hopes were dashed before they could go unconditional, as one of them was self employed.
“I’m like a lot of moms – I work from home so I can be with my kids,” Kayleen Grimstrup said.
“I do home child care. And even though my gross income is close to $60,000, the banks aren’t going to reduce the gross pay of self-employment – they’re going to reduce your tax bill.
The couple’s income was “classified as risky” by most banks, and they could only borrow from a second-tier lender. In front of an exorbitant floating interest rate – almost 10% – they withdrew from the transaction.
CoreLogic Head of Research Nick Goodall explains how falling house prices are making the market more affordable for first-time home buyers
“We did the math and, honestly, we could have afforded to do it. [pay 10%]”, Grimstrup said. “But what if they raise the rates to 12% or 15%? That’s not something I want to go to bed at night in. disturbing.
“If we were millionaires, maybe – but we’re just a middle-class Kiwi family.”
Brock Shute of Mortgage Advice Company is the family broker. He explained how the difference between gross and net income – often a big difference for home childcare providers – could lead to higher interest rates.
A supplier’s gross income of $50,000, for example, could be reduced to $20,000 of net income, after the supplier claims their expenses. One option would be to not claim those expenses — essentially using gross income as net income — but that was a big sacrifice too, Shute said.
“In a sense, you can’t have your cake and eat it too,” Shute said.
“And unfortunately, home child care providers are running these relatively large expenses on their books to offset their tax. I think they get the harder end of the stick, with this particular situation.
Mortgage Lab chief executive Rupert Gough did not believe the situation represented a systemic failure on the part of the banks.
“I can’t put the banks on that one – because, really, net profit is how much money you have left in your business after the costs are out.”
Self-employed people — or their accountants — needed to think ahead if they were considering buying a home, he said. “Maybe they’re not maximizing tax losses as much as they would.”
Grimstrup said she understood banking policy, but was frustrated by the greater pressures in the housing market and the feeling of “working so hard and getting nothing done.”
She knew of other home childcare providers who were also being cut off from affordable home loans.
The family were serving a notice period on their tenancy – and now had to move twice, if they bought next year, which for her would mean moving home and work both times.
“Mentally, I can no longer cope with visiting houses before Christmas. I have lost weight due to the stress of the past few weeks.
Data from CoreLogic did not indicate the market was improving for first-time home buyers, whether independent or not.
Between July and September this year, 539 households in Wellington had bought their first home, compared to 703 households in the same months last year.
However, purchases by first-time home buyers in Wellington had fallen in line with other buyer activity – first-time home buyers accounted for 32% of all home purchases this year, down from 31% last year.