Ask Susan: Can solo parents on a benefit get a home loan?

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Solo parents receiving solely Ministry of Social Development financial support have recently been obtaining home loans, some with simply the 5 percent deposit. What are the general overviews banks are taking into consideration when deciding to approve or decline these home loan applications please? Does this same approval rate apply when 5 percent deposit has been gifted? Are there particular bank or third-tier lenders that seem more lenient/understanding of a person’s personal circumstances in deciding to grant?

In this situation, your best bet probably would be to aim for a First Home Loan through Kāinga Ora. These are available to individuals with income of up to $95,000 a year, or couples or solo parents with income up to $150,000.

Unlike “normal” home loans, the 5 percent can be a gift, you don’t have to have saved it yourself.

Beyond that, though, the key will be assuring the lender that you can service the loan with your income.

You could get a boarder in to help boost what you earn, but that will also increase the size of the property you have to buy. Mortgage broker Glen McLeod says banks won’t want to see you buying a property in which you will have to share a room with your child, for example.

Banks generally all have similar ways of working out how affordable a loan might be and they all have a requirement not to give a person a loan that will put them into hardship. But a broker can sometimes offer guidance on which banks might have more appetite for your type of deal.

Second-tier lenders tend to require more of a deposit and have higher interest rates – third-tier rates are higher again. I’d recommend going to a mortgage adviser in the first instance to look at your numbers and see what might be possible.

So the Reserve Bank raises the official cash rate, which raises the cost of money to the retail banks, who pass on this increased cost to borrowers. What does the Reserve Bank do with all that extra cash they’ve just skimmed off the indebted? Do they invest it and generate a return which appears on a balance sheet somewhere or does it just disappear into a fiscal black hole?

The Reserve Bank itself doesn’t make much money out of increasing the official cash rate. While it increases what it charges banks, it also increases what it pays those depositing with it.

Its most recent annual report said that at 30 June, 2023, there was $72.5 billion deposited with it by retail banks and the New Zealand government.. The bank has an agreement with the government about an acceptable amount of money for it to hold on to each year to cover the financial risks of its role – any profits it makes beyond that go to the government.

Last financial year, it did not pay a dividend.

Enjoying the articles on money on the RNZ site. But just a quick point – you note that those on low incomes and who don’t own a home aren’t as impacted by interest rate rises. I’d point out that unless they are in houses limited by income-related rent schemes, they absolutely are. There seems be a disconnect in people’s thinking that renters aren’t as much impacted as homeowners by these core expense increases. Rents rising has been relentless, and rates increases or mortgage interest costs have generally been given as the reason. Even for those without mortgages on their rental, there is a tendency to increase with the market.

While I understand that rising interest rates are frequently being cited as the reason for increasing rents at the moment, I’m not sure that it’s fair to say that it is rising interest rates that drive rents up.

Rents have been rising quickly in the past year. But so too have household incomes and the population. These factors – what tenants are able to pay in terms of their income and demand for rental properties – are much more likely to drive rents than what investors are paying in interest.

The rental market isn’t working on a cost-plus model, where investors cover their costs and then ask for a bit extra. Investors are setting rents at the maximum the market will bear. As the market has the capacity to pay more, as in recent years, they might increase their rents and justify it by saying that their own costs have gone up – but I’d argue that’s not the reason for the increase.

It’s also the reason why I’m sceptical of claims that rents will come down when landlord costs reduce. Rents might come down if the market is unwilling to pay a certain level of rent any more (maybe because there are lots of options, or people’s incomes have dropped) but they won’t come down just because investors have smaller bills.