Major changes to the Credit Contracts and Consumer Finance Act (CCCFA) that came into force from December 1 are already having a detrimental effect on house buyers.

Banks are declining mortgages at a bigger rate after taking a fine-toothed comb to people’s spending habits, missed payments and unarranged overdrafts.

Lenders are now forced to trawl through bank statements in detail looking at every aspect of an applicant’s life, including where they shop and what they buy. In some cases rejection can boil down to how many coffees people buy and how often they visit KFC or McDonald’s.

AdviceHQ director David Green says this has always been the case to some extent, but banks’ tolerance levels are now significantly reduced. “It means more compliance, more delays, less time spent on quality independent financial advice and innovation.”

Mortgage top-ups are no longer available. A full application is required even if a property owner wants an extra $5,000 to build a deck.

Independent economist Tony Alexander says many applicants cannot qualify for a mortgage now. This includes people for whom retirement might come within 15 years of a mortgage being taken out, and the self- employed. “It even for the moment includes those for whom income in the near future is in doubt because they refuse to get vaccinated and may lose their job.”

The new legislation is failing homeowners and has serious unintended consequences, says Green.

When assessing mortgage eligibility, lenders have to take steps to independently verify information, such as household expenses the borrower has provided, and back it up with reliable supporting evidence and make adjustments if necessary.

“Most borrowers are not aware of the changes, so the requirements will hit them hard, particularly if they are older or self-employed,” says Green. He advises property investors or anybody needing a mortgage to plan ahead, seek independent financial advice and smile nicely if asked for more details on information provided, along with supporting evidence.

How The Rules Work

Under the new rules there are detailed new regulations setting out how a lender tests whether a loan is suitable for a borrower, and tests whether the borrower can afford the repayments. These are intended to better protect borrowers. They require lenders to apply more scrutiny to borrower affordability. Borrowers have to provide more detail and evidence around their spending, as well as their income, when they apply for loans.

Green says the CCCFA changes are resulting in longer and more complex application processes for mortgages. It is also taking banks longer to give a definitive answer to a mortgage application.

And it is only going to get worse, he says. “When the CCCFA changes removal of mortgage interest as a taxable expense for investors, loan-to-value ratios and debt-to-income levels, already being used by some banks, all kick in together, it will restrict lending further.”

Investors and people wanting a mortgage or top-up will have to be prepared to demonstrate good financial behaviour and understand every line on their bank statement on where they spend their money every week or month, how often and what for.

While lenders are already required to make enquiries into loan affordability and suitability, they will also now need to follow a specific process which involves further information verification and more transparency around the calculation of any fees or charges.

The changes have generated intense debate. They came through concerns the previous 2015 changes to the CCCFA did not go far enough to restrict predatory “loan shark” behaviour. However, last month’s changes go much further than correcting that sort of behaviour — they impact the entire credit sector.

Across The Ditch

Green says the changes seem unnecessary in the mortgage space. “Banks have always had responsible lending practices, loan stress tests, there is nothing to suggest there is a rise in bad debt or delinquencies. The problem with the legislation is that it is designed for high-risk consumer finance lending and dealing with finance companies, but it covers everything including mortgages.”

In Australia (which originally inspired the introduction of “responsible lending” rules in New Zealand) the government is now seeking to ease restrictions on lenders, warning against “unnecessary barriers to the flow of credit to households”. If the Australian government successfully pares back the regime, as proposed, it will leave a stark contrast to the detailed and prescriptive demands of New Zealand’s new framework.

Green says NZ banks are interpreting the CCCFA changes too literally. “How does that benefit clients? Their judgment on potential borrowers’ lifestyles is not fair and should be loosened up.”