The Credit Contracts and Consumer Finance Act (CCCFA) isn’t the real culprit when it comes to getting a loan.
We’ve all heard how banks are undertaking forensic analysis of borrowers’ statements. But the ‘Netflix ate my mortgage’ narrative has stopped many a potential home buyer who could still qualify if they just tried.
There is no doubt the CCCFA is affecting some buyers. Since December 1, lenders have been required by law to take more care to ensure loans are affordable. They’re drilling down into every last entry in borrowers’ bank statements. At times, normal spending has been judged frivolous, making the loan ‘unaffordable’ on paper.
However, a good mortgage adviser can pre-empt this.
Why the CCCFA isn’t the culprit
The irony is that the CCCFA is being made the scapegoat. Yet it’s not even the number one reason that some home buyers miss out.
Look more closely and three other key reasons stand out as the cause of home buyers failing to get loans. That’s rising interest rates, tighter loan to value ratios (LVRs) and the scaling back of rental income by banks.
1. Rising interest rates. Mortgage interest rate rises led by the Reserve Bank of New Zealand’s Official Cash Rate (OCR), have resulted in banks upping the test rates they use when determining how much a borrower can afford to repay. Higher interest rates result in larger mortgage repayments, which means borrowers can’t afford to pay as much as they did when interest rates were lower. At the same time inflation has led to banks updating the standard living costs for a family that they use in their affordability calculators.
2. Tighter LVRs. Late last year the RBNZ quietly tightened its LVR rules, meaning many first home buyers and others looking for low deposit borrowing could be locked out. The new rules from November 1, 2021, halved the number of loans banks could offer to buyers who haved less than a 20% deposit. That makdes it harder for first home buyers.
3. Property investor handbrakes. Thanks to new tax rules most property investors will no longer be able to claim the mortgage interest they pay against the rent they earn. That increases investors’ overheads, and banks are taking that. Banks take this into account when calculating affordability. It wasn’t uncommon last year for banks to discount the rental income by 20 or 25% in their calculations. Now it’s more like 35 to 40%.
Don’t hold back
Industry sources report a 20-30% drop in inquiry by buyers. Yet many of those not picking the phone up, might qualify for a loan, if they simply tried.
Holding back now may not be a good strategy. There is no guarantee that conditions won’t worsen. Nor is there an assurance that the government’s CCCFA inquiry will result in changes.
Instead, buyers, and those wanting to remortgage or extend the loan need a plan of attack. That’s where a mortgage adviser comes in. We can assist in creating that plan.
An adviser can help you understand your objectives, then assess your current situation and align it to lending requirements.
The adviser pre-empts any issues a bank may raise, by going through spending patterns and spelling out in the application what’s regular spending and items that are one offs. Where there are potential problems for borrowers, most can be solved.
Even if you’re not ready now at least you’ll know what you need to do to meet the bank’s lending criteria, not just the CCCFA.
Loan approvals going ahead
While many in the mortgage advisory business are reporting a drop in lending, Global Finance has kept its approvals ratio at the same level as it was before the CCCFA’s D-Day on December 1, last year.
The reason for that is we have spent time as organisation understanding exactly what the law is about, what the banks are looking for, and then changing our own processes to present the application on behalf of the customer. The banks get exactly what they’re after. They want to lend, after all. That’s the business they’re in. That makes a good application a win/win for bank and customer.
Navigating choppy waters
Think of a good mortgage broker as a raft guide, navigating choppy waters. The thing with rafting, or applying for loans, is unless you step into the water and get on the raft, you won’t get from point A (applying) to point B (approval). The raft is the loan application.
Yes, it’s choppy out there. It’s not going to be a smooth ride, and it takes courage to get to your destination. But the outcome is better than being stranded on the shore.