What to do when home loans are harder to get, and approved amounts are smaller

New lending rules have created more hoops to jump through, cut off credit to borrowers who would have qualified only months ago, and generally shrunk the size of loans being approved.

On top of that and tougher rules around loan-to-value ratios, borrowers are competing in market where prices continued to climb even as factors that might cause a fall stack up.

Stuff spoke to the chief executive of a nationwide mortgage advisory, the managing director of a financial advice firm, and the country’s largest home-loan-supplier, about what borrowers should do in this environment and what they can do to speed up the process of getting a home loan.

Both advisers pointed to a key driving force making getting a loan is harder – changes to the Credit Contracts and Consumer Finance Act (CCCFA) that came into force on December 1.

So what has changed in the CCCFA, and why is it making it harder to get a home loan?

In the past, banks required borrowers to have their deposit, and evaluated their ability to afford a mortgage based on their income.

The banks had a certain amount of leeway to make a judgement call about whether the borrower could be trusted to tighten the purse strings if times got tough.

Under the CCCFA, lenders are required to look at customers’ spending during the three months before granting a loan, as well as any other debts they are carrying, and essentially decide if they can afford a mortgage based on that behaviour.

Even in the two months after the changes came into force, there were signs the CCCFA had affected the number of loans being handed out.

Centrix is a credit reporting agency, and its data shows the number of home loans being issued a month dropped by nearly a quarter (23 per cent) after the CCCFA came in, falling from around 30,000 a month to 23,000, on average.

Reserve Bank data also shows a fall off in the amount lent out in home loans.

Between November and December, total mortgage lending fell 13 per cent, going from roughly $9.1 billion to $7.9b.

This put December pretty much on a par with an average month in 2021, and lending remained well above previous years. The Reserve Bank data also shows lending in December was down for investors, first-home buyers, and movers alike.

Who is responsible for the credit squeeze is becoming a hot topic – critics of the new rules say the banks are shying away from lending because of the added admin and the fact senior bank managers and directors now face fines of up to $200,000 if loans are deemed irresponsible.

Commerce and Consumer Affairs Minister David Clark meanwhile has accused banks of failing to abide by responsible lending laws before December 1, and launched an inquiry into how banks have changed their practices.

The reason lending has gone down is important, but for the average home-buyer, it’s more about what that means for them.

Mortgage Lab chief executive Rupert Gough says he sees clients who would have been approved before Christmas no longer qualifying, but it’s not the number of loans being approved that’s changed the most but the amount borrowers are approved for.

He says it’s common to see a 20 per cent to 25 per cent reduction in borrowing capability, and say’s he’s had first-home buyers who were approved for $1 million home loans three months ago now only qualifying for loans of $750,000 to $800,000.

Gough says it’s important hopeful home-buyers start living as if they had a mortgage three months before applying, keeping expenses as low and possible, and cutting discretionary spending – essentially to prove you can do it when you actually have a mortgage to repay.

His advice mirrors ANZ’s. The bank provides a list of things customers can do to speed up the process, and maximise their chance of getting a loan approved.

The checklist

The top of the list – check you have 90 days’ worth of bank statements for the account or accounts used to pay expenses from (this could include credit cards).

The next thing – get evidence of your income.

“If that’s in your bank statements – that’s perfect, otherwise, we may need payslips, employment contracts, or other documents that show that income,” an ANZ spokeswoman says.

Having electronic copies of your statements and other evidence is preferable, and borrowers are reminded to check with their lender on format.

The spokeswoman says customers should prepare for more in-depth questions about their finances.

“Even customers who have a relationship with ANZ going back many years will be assessed using the same criteria as someone who is new to the bank,” she says.

Effects felt across the board

Gough says getting a loan for renovations has also become harder, because such mortgage top-ups are treated with the same scrutiny as any other application.

Gough says those trying to move house can also find it harder to get a mortgage until they’ve sold, and are increasingly unwilling to put in any offers until they have a buyer lined up.

He says increasing numbers are shying away from bridging finance (shorter-term, higher-interest loans supplied to bridge the gap between buying and selling) because there are concerns the market might fall.

“Taking a bridging loan is taking a bit of risk, you’re trusting you can sell your old property in the next six months or so, but with questionable direction in the market people are not taking that on.”

Non-bank lenders supplying (more expensive) alternative

The founder of mortgage brokerage Squirrel, John Bolton, says international evidence suggests rules like the CCCFA increase the proportion of loans coming from non-bank lenders.

He predicts their share of the market will go from roughly 3 per cent to 10 per cent – but borrowers should be aware, these non-bank home loans come with higher interest rates.

Bolton says homeowners might be paying 3.6 per cent or 3.7 per cent with the bank, but they could be paying anywhere from 4.5 per cent to 7 per cent with a non-bank.

More charges may be on the way

Gough says he is yet to see banks, mortgage advisers, or solicitors charging more during the mortgage application process, despite the added workloads.

“Solicitors shouldn’t have any additional work to do as the documentation stage has not changed significantly. So really, it’s the margins for the banks that are being squeezed,” he says.

“I haven’t seen any additional upfront costs for the banks change at the moment, although it must be costing them a lot when their workload has tripled.”

He says feedback from banks suggests they are hoping the regulations will be reviewed, before they have to accommodate the added workload by increasing interest rates or bringing in upfront fees.

Bolton believes they will come in the form of more establishment fees and similar.

Logjams developing

Rod Schubert, managing director of Rod Schubert Financial Advice (RSFA), says borrowers need to be aware processing times of loans are getting longer.

In the past, during busy periods, a loan application might take two weeks to be processed. Since the CCCFA changes, he says it’s regularly taking two weeks or more.

This could create issues with buyers making auction dates, since they needed pre-approval to bid.

He also warns borrowers they may be asked to supply double-documentation to verify expenses. In other words, a bank statement showing insurance payments might not be enough, and they may need to supply receipts from the insurance companies as well.

Customers with a blemish on their financial record (such as an overdue bill that went to a collection agency) might also find themselves rejected under the new rules.

This can be particularly damaging, Schubert says, because normal people can have issues when their businesses get into trouble or there’s some life upheaval, like a divorce.

Such blemishes are generally expunged after five years, he says, but until then they could be another hurdle.

Christchurch-based RSFA advisor Anne Balila works a lot with Filipino and migrant borrowers, and says because they’re often on middle or low incomes they struggle to reach the 20 per cent deposit.

“They feel like they need to work more hours and/or add a second job just to qualify,” she said.

Many migrant families also occasionally send money home to their families, Balila says, which can be picked up by the bank as an unwarranted expense and count against them.

The effects of the new lending rules are likely to stick around for a while, Gough says, because unlike other levers that can be pulled and relaxed to cool or speed up the market (such as loan to value ratio and debt to income ratio requirements) law changes like the CCCFA cannot easily be turned on and off.

Borrowers should get used to the new reality for at least the next six months.