Sarah has been in her job for 8 months and earns $65,000 annually. She has a $15,000 car loan and wants to buy a $450,000 house with a 10% deposit. What is likely to be the main lending concern for most banks?
Correct Answer
B) Her employment history is too short
Most banks require at least 12 months of employment history to demonstrate income stability, and Sarah has only been in her job for 8 months. While other factors may also be considerations, employment history is typically the primary concern in this scenario.
Why This Is the Correct Answer
Employment history is the primary concern because most New Zealand banks require a minimum of 12 months continuous employment to demonstrate income stability and reliability. Sarah's 8-month employment history falls short of this standard requirement. Banks view employment stability as the foundation of loan serviceability - without proven income continuity over time, the borrower presents higher risk regardless of other positive factors. This requirement is consistent across most major lenders and is a fundamental lending criterion that takes precedence over other considerations in this scenario.
Why the Other Options Are Wrong
Option A: Her deposit amount is insufficient
A 10% deposit ($45,000) on a $450,000 property meets standard lending requirements. While some banks prefer 20% to avoid LMI, 10% deposits are commonly accepted, especially for first-home buyers with stable employment and adequate income.
Option C: Her income is too low
Her $65,000 annual income is reasonable for a $405,000 loan (after 10% deposit). This represents approximately 6.2 times her annual income, which falls within acceptable lending ratios for most banks, particularly with her manageable existing debt levels.
Option D: Her existing debt is too high
A $15,000 car loan against a $65,000 annual income represents a manageable debt-to-income ratio of approximately 23%. This level of existing debt is not excessive and wouldn't typically be the primary lending concern for most banks.
Deep Analysis of This Finance Question
This question tests understanding of bank lending criteria and risk assessment in New Zealand's mortgage market. Banks evaluate multiple factors when assessing loan applications, but employment stability is paramount as it directly impacts the borrower's ability to service the loan over its term. The scenario presents Sarah with reasonable income relative to the property value, adequate deposit meeting standard LVR requirements, and manageable existing debt. However, her 8-month employment history falls short of the typical 12-month minimum most banks require. This requirement exists because employment stability is the foundation of creditworthiness - without proven income continuity, other positive factors become secondary concerns. Understanding this hierarchy of lending criteria is crucial for real estate agents advising clients on purchase readiness and timing.
Background Knowledge for Finance
New Zealand banks assess mortgage applications using multiple criteria including employment history, income stability, debt-to-income ratios, deposit size, and credit history. The standard requirement is 12 months continuous employment to demonstrate income reliability. Loan-to-Value Ratios (LVR) restrictions mean most banks accept 10-20% deposits, with Lenders Mortgage Insurance available for smaller deposits. Debt-to-income ratios typically shouldn't exceed 6-7 times annual income. The Reserve Bank of New Zealand's LVR restrictions and responsible lending requirements under the Credit Contracts and Consumer Finance Act influence these criteria. Understanding these fundamentals helps real estate agents properly advise clients on purchase readiness.
Memory Technique
Remember TIDE for bank lending priorities: Time (employment history - 12 months minimum), Income (adequate and stable), Deposit (10-20% typically required), Existing debt (manageable levels). Time comes first because without employment stability, other factors become irrelevant.
When analyzing lending scenarios, work through TIDE in order. If Time (employment history) is under 12 months, this is likely the primary concern regardless of how strong the other factors appear.
Exam Tip for Finance
Look for employment duration first in lending questions. If it's under 12 months, this is typically the main concern. Banks prioritize income stability over income amount, deposit size, or moderate existing debt levels.
Real World Application in Finance
A real estate agent meets with first-time buyers who are excited about a property and have saved a good deposit. During pre-qualification discussion, the agent discovers one partner recently changed jobs 6 months ago for a significant pay increase. Despite the higher income and adequate deposit, the agent must explain that most banks will require waiting another 6 months to meet the 12-month employment requirement, potentially saving the clients from disappointment and unsuccessful applications.
Common Mistakes to Avoid on Finance Questions
- •Focusing on deposit percentage without considering employment stability requirements
- •Assuming higher income compensates for short employment history
- •Overlooking the 12-month employment rule when other factors look positive
Related Topics & Key Terms
Key Terms:
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