There’s much in the media about recent government changes that are making it harder for both investors and owner-occupiers to get mortgages. The changes receiving most of the negative airplay are around the CCCFA (the Credit Contracts and Consumer Finance Act 2003).
CCCFA laws and lending restrictions
Since December 1, additional onus has been placed on lenders to ensure loans are affordable. This has led to banks taking a very close, almost forensic, interest in potential borrowers’ spending habits. Banks are undertaking deep examinations of mortgage applicants’ expenses, incomes and stability to ensure loans are affordable before they can be approved.
Referred to by some as draconian, the CCCFA is being touted as the primary reason why many can no longer get home loans. However, we don’t think that is a fair depiction of the current economic scene.
In fact, even if CCCFA laws were reversed, we don’t believe it would make borrowing from responsible lenders any easier.
The CCCFA does not influence the availability of money out there
The CCCFA is just one of a series of measures put in place and does not in fact have an effect on the amount of availability of money in the market.
Inflation is soaring around the world, not just in New Zealand. Domestic prices are growing rapidly and at the end of 2021, inflation had hit a 31-year high of 5.9%. As a result, the Reserve Bank has been increasing the Official Cash Rate (OCR) and tightening conditions for mortgage lending. The end to tax deductions on interest costs for rental properties have also meant investor rental income is viewed differently when it comes to loans.
These are the factors that directly affect how much money there is to lend and why mortgages have been getting harder for some to get. Not the CCCFA laws which are there to ask for evidence around affordability.
So, let’s unpack this a little.
Inflation is higher than it has been for a generation, and it is predicted to continue climbing through the year.
A high inflation rate means your money buys less; finances are squeezed. If borrowers are unable to keep up with mortgage payments because incomes cannot keep pace with consumer price rises, nobody wins. Banks are therefore lending less because they have to ensure household living costs can keep up relative to inflation. As a result, almost all banks have incorporated the increased living costs in their assessment therefore tying their ability to lend more in lending.
To counter growing inflationary pressures, the Reserve Bank (RBNZ) has been raising the Official Cash Rate (OCR).
The (OCR) influences the price of borrowing money in New Zealand. A move in official interest rates up or down is a way to influence lending by banks to households and businesses. In response to the economic consequences of COVID-19, central banks around the globe dropped interest rates.
Historically low interest rates and lack of supply hiked house prices. Determining that the economy no longer needed the emergency stimulus, and to try and calm the residential property market in New Zealand, the RBNZ has raised the cost for banks to borrow. This has been reflected by the banks by updating and increasing the assessment rate or test rate from 6% to nearly 7% at which they are assessing a household lending capacity further leading to reduce borrowing power for many potential home borrowers.
Tighter lending criteria also included a reduction in the availability of low deposit mortgages.
Since November 1, 2021, banks have been required to lend no more than 10 per cent of new loans to people with a deposit of less than 20 per cent. These changes essentially halved the portion of loans available to owner-occupiers after a mortgage greater than 80 per cent of their property’s value.
Rental income can now only cover 60-65 percent of mortgage payments, reducing borrowing power.
Some banks have decreased the percentage of rental income they take into consideration when assessing new home loan applications from 75 per cent to 65 per cent. Others have reacted by factoring the costs of home insurance and rates separately in their lending criteria. The interest costs on the residential investment property (non-new build) acquired on or after 27 March 2021 can no longer be offset against rental income, so banks take less rent into consideration when calculating the servicing of residential investment properties therefore reducing the borrowing capacity of someone looking to purchase residential investment property.
It’s about affordability not availability
Rising interest rates, inflation, loan-to-value ratio (LVR) restrictions, Official Cash Rate rises, and removal of interest tax benefits for investors are why dynamics have shifted and banks are tightening lending, not just CCCFA laws.
Responsible lending practices are in place to help prevent borrowers taking on debt they cannot afford to pay back. Nobody wants anyone to over-commit financially and make themselves vulnerable when borrowing for a house. Banks need to know you are able to service a mortgage because if you can’t, that causes them problems. They want you to succeed because that way they also succeed.
We’re here for first-home buyers
CCCFA changes have, however, made a mortgage application process much more tedious. Banks are asking harder questions about your ability to repay a home loan. You may expect to face tighter scrutiny on the security of your job and your financial position, verify expenses and provide more granular details around your spending.
You will need to provide more documents to show you will be able to meet your loan obligations. This is likely to be a time-consuming process, but one that our team of experienced mortgage brokers is very good at. Our team can guide you through the application process, highlighting your strengths and maximising your chances of a loan approval.
Ready to get started on getting a mortgage? Talk to us today
For more information regarding these or any other changes to the rules around mortgages in New Zealand, contact Global Finance on 09 255 5500 or send us an email at info@www.globalfinance.co.nz