What the CCCFA changes mean for homebuyers
Changes to the CCCFA from the 7th July will make it easier for buyers
The amendments around responsible lending added to the Credit Contracts and Consumer Finance Act (CCCFA), on December 1, 2021, had a big impact on banks and mortgage lenders’ attitudes to approving loans, as lenders wanted to be seen as cautious. The amendments have been blamed for a drop in lending and a credit crunch which has dogged the property market since late last year. People who normally would have expected to get mortgages were turned down or told they couldn’t borrow as much as they wanted.
But from July 7 2022, some of the restrictions put in place as part of the CCCFA will be pulled back by Commerce and Consumer Affairs Minister David Parker, as outlined on the Ministry of Business, Innovation & Employment (MBIE) website. It’s a move that has been welcomed by home buyers and mortgage advisers.
From this date, lenders will no longer require borrowers to show strict saving behaviour three months prior to applying for a loan. Instead, homebuyers will have to reassure lenders that they have a detailed and clear idea of what their future living expenses will be once they’ve bought their home.
“The big thing,” says CoreLogic Chief Property Economist, Kelvin Davidson, is that banks can now make the assumption that even if you’re not “squeaky clean” now, that you’ll change your behaviour later.
Lenders won’t need to comb through bank transaction records but will just ask for information directly from people looking to borrow, as used to happen. In another change, regular savings and investments will not be seen as an example of outgoings that lenders need to inquire into, explains Loan Market’s mortgage adviser, Bruce Patten.
MBIE also advised that providing alternative guidance and examples for when it was “obvious” that a loan was affordable, would be fine.
Watching your expenses is a good idea in the run up to a home purchase, but the CCCFA amendments went a bit far because people who should have got a loan didn’t, and the burden fell most heavily on first home buyers, says Kelvin. In some cases, it sent homebuyers into the arms of more expensive non-bank lenders.
“The original intention of the CCCFA amendments in December was to protect people from loan sharks, but it had perverse consequences,” says the CoreLogic economist.
The fact that the Minister has made these latest amendments to kick in July shows that the legislation had a negative effect and overstepped. It also put people off applying for loans when they heard the stories of seemingly good candidates being turned down, adds Kelvin.
The chief economist cautions that there are other important reasons for a slowing housing market. These include the Reserve Bank’s LVRs (loan-to-value ratios), (where banks can only allocate 10% of their owner occupier loans to people with less than a 20% deposit), as well as rising interest rates.
“The buyers’ market is here and there’s lots of choice, but to be a buyer you have to jump through hurdles. And sellers aren’t desperate, they’re not forced sellers,” warns Kelvin.
What do banks say?
The key question with the changes in July is how will banks interpret the updated amendments, says Loan Market’s Bruce Patten. Hopefully, this will give them enough licence to make it work for everybody, he says.
The Loan Market mortgage adviser says he was speaking to an executive of one of the main banks and the banker said that they would interpret the new amendments as “liberally as they could.”
Top Loan Market mortgage adviser, Paulette Trotter, who has formerly worked with ASB Bank, says three of the banks were “really bad” about approving loans after the CCCFA amendments in December – you had little chance of getting across the line, she says. The other three used a more commonsense approach. The banks who were difficult to please have already “lightened up” and will be lightening up further, she expects.
In its comment to Trade Me, ANZ, while it acknowledged the upcoming changes as an improvement, it warned consumers about getting their hopes up too much.
“Rather than making things easier for borrowers, we feel the confirmed changes risk raising hopes of a solution that hasn’t been delivered,”says a spokesperson.
The amendments in July won’t address the detailed list of expenses still to be captured and verified which involves extensive and time consuming inquiries, she says.
“We’ve suggested further changes, including adopting models from the UK and Australia which ensure lenders only collect expenses on basic necessities, not discretionary items.”
A Kiwibank spokesperson told Trade Me that it was still working through the latest changes published by MBIE to see how they would impact customers. “The changes announced haven’t gone as far as we were hoping,” she said. More may come out of MBIE’s broader review into the impact of CCCFA, she added.
“We’ll be focusing on what we can take from the changes to improve customer experience and outcomes, particularly in situations where it’s obvious the customer can afford lending. It’s positive that the requirement to take “savings” and investments” into account when assessing a customer’s likely expenses has been removed,” says the spokesperson.
An ASB spokesperson told Trade Me: “We fully support responsible lending and we’re committed to ensuring our customers can afford their lending without facing undue hardship. We welcome the Government’s update to the regulations and the new Responsible Lending Code taking effect on July 7,” she says.
ASB will be making changes to its lending assessment including removing the requirement for savings and investments to be treated as living expenses and adopting the new guidance regarding circumstances where affordability is obvious.
“While these changes are positive, it should be noted that we still believe more needs to be done to ensure access to responsible lending is not restricted for those we know can afford it,” adds the spokesperson. ASB will be working with the Government on the next stages of this process.
The New Zealand Bankers’ Association has also said that more change is necessary and that banks don’t have the same discretion and flexibility that they used to, having to use a one-size fits all approach.
One of the biggest concerns among high up bank executives was the CCCFA amendments in December made senior leadership at lenders personally responsible for any evidence of irresponsible lending, with the prospect of a fine of up to $600,000 if found guilty of this. Even in the run up to December 1, this made banks and lenders much more cautious about who they gave loans to and how much that loan was, and this is still in place.
The Bankers’ Association is awaiting the results from a broader review being done by the Council of Financial Regulators which isn’t far away.
What mortgage advisers recommend next
Ultimately, it’s a really good start, says Loan Market’s Bruce Patten. “These changes will make it better for the right people borrowing for the right reasons. It's not going to make it different in a wholesale way but it’ll be easier for the poor people who filled out a form correctly and maybe spent a bit too much money over Christmas, to get a loan,” he says.
“Banks still want to lend and they still want to be responsible, this is removing one of the barriers,” adds the Loan Market mortgage adviser.
Is there a strong appetite to lend given the current circumstances, asks seasoned mortgage adviser, Geoff Bawden.
“One thing everybody is noticing is there are no shades of grey as there were in the past. Everyone is dealing in black and white. If it doesn’t fit the criteria, it won’t happen. I had one case where the borrower had an inheritance coming but the bank still said no,” says Geoff.
Another trend the mortgage adviser has noticed is that secondary lenders are growing their market share, and there’s been a strengthening of an alternative stream of mortgage lenders who operate between first and second tier lenders.
Resimac and Pepper Money, for example, are “playing in this middle ground” and are picking up quite a bit of business from borrowers.
“They’re playing in the middle ground quite successfully as markets evolve,” says Geoff.
Luke Jackson, head of Resimac in New Zealand, describes Resimac as an alternative lender. Looking at the proposed changes from July 7 to the CCCFA, it’s almost as if MBIE has copied what Resimac does, he says.
“We’ve not been asking for bank statements since 1 December, we benchmark expenses, so there’s no change for us,” says Luke.
If people have been turned down for home loans, it just means nobody has introduced them to an alternative bank lender, says Luke. Resimac does a lot of work with professional investors, as well as with the self-employed and the credit-impaired.
“We just look at people’s individual situations whereas a bank puts a policy across a whole market,” says Luke.
If you’re preparing to buy, he advises talking to a good capable financial adviser or mortgage broker who’s aware of the full offering of lenders including the alternative lenders.
So what next?
It’s a good time to test the waters again if you’ve been declined previously, says Loan Market’s Bruce Patten.
With interest rates higher, your mortgage adviser will have to start their calculations again about what you can afford, how you can service the loan, but house prices are falling and you may have had a wage rise given the competitive jobs environment.
Another recent positive for first home buyers, has been the first home buyer house price caps for First Home Grants in Auckland for instance, have gone from $700,000 to $875,000.
“Relaxed bank scrutiny and changes to first home grants are definitely a good news story,” says Loan Market’s Paulette Trotter.
“It’s a buyers market, people should act now and lock in rates,” she adds
She expects the Official Cash Rate to go up to 3% and possibly another 1% on top which will take mortgage rates to 6% and more.
The advice from Dustin Lindale, a Mortgage Lab mortgage adviser and a director of the First Home Buyers Club, is don’t rush in and make offers. But it’s definitely worth revisiting what your affordability looks like in light of rising interest rates, he says.
Get yourself in a position where you’re ready, where you understand what you can potentially afford. Make use of the slowdown in the market to research what prices are doing and what you feel comfortable with, and what your affordability is, and then when you feel the time is right, take the next step, he says.
Will things go back to the way they were? The short answer is no, says the mortgage adviser. But they’ll be better than they have been, when people who fully and reasonably expected to get mortgages will have a better chance.
“We were 9/10 for difficulty in getting loan approval since December 1, now it’s back to 6/10 or 7/10, and before the CCCFA amendments at the end of last year, it was 5/10,” he says.
Meanwhile, to give yourself the best opportunity to increase affordability, get your debt as low as possible. This increases your chances when you’re a low deposit home buyer, says the First Home Buyers Club director.
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