What to do when your mortgage application is declined

Less than half of all mortgage applications are approved these days. You’re not alone.

26 January 2024

If your mortgage application has been declined, it may help to know you’re not alone. Less than half of all applications are approved these days. While the new lending rules have certainly made things more challenging, declined applications have always been more common than you might think.

At this point you’ve put in a mortgage application and backed it up with your financials and future plans, but the answer has been ‘sorry, not at this time’. It certainly doesn’t mean never. The most important thing is to not give up on achieving your goals. Look for what you can learn from this experience, get the advice and coaching you need, and come up with a new plan.

Understanding why your mortgage application was declined

The first step is to find out why your mortgage application wasn’t successful this time. Don’t be shy about asking questions. While having your application declined can be hugely disappointing, it’s important to dive into the details and check your assumptions are correct. That way your next application, whenever that might be, may have a greater chance of success. Simply repeating the same application with one lender after another is unlikely to have a positive outcome. In fact, frequent applications for loans that are all declined may damage your credit score.

The four main reasons why lenders decline mortgage applications

1. Loan-to-value ratio

A loan-to-value ratio (LVR) compares the size of a mortgage to a property’s value, which is usually determined by a registered valuation. A typical LVR limit of 80% means the mortgage can be up to 80% of the property’s value, which means the deposit must be at least 20%.

LVR restrictions are designed to prevent people owing more than their property is worth, should house prices fall. They also ensure lenders can recover the money they’re owed by selling a property as a last resort when a borrower can’t keep up mortgage repayments.

Reserve Bank regulations implemented on 1 May 2021 allow a small percentage of each lender’s new mortgages to be ‘high LVR’ (low deposit) home loans. A high LVR is defined as anything over 80% (deposit less than 20%) for owner-occupiers. For investors it means any LVR over just 60% (meaning a deposit less than 40% of the property’s value). A borrower with both owner-occupied and investment properties can use a ‘combined collateral’ exemption to raise the LVR limit on investment properties to 70%.

For each lender up to 10% of their new mortgages for owner occupiers can be high LVR, but only 5% can be high LVR mortgages for investors. Any lender still has to gather and keep evidence of why they decided the mortgage was affordable and suitable for the borrower.

There are some LVR limit exemptions, such as when borrowing:

  • To build a new home
  • To do non-routine repair work, such as fixing a leaky home
  • Through Kāinga Ora schemes, including First Home Loans

LVR restrictions can lead to a mortgage application being declined when:

  • The registered valuation of a property is less than expected
  • The lender is rationing their high LVR (low deposit) new lending, to stay within Reserve Bank limits
  • The higher interest rates typically charged for a high LVR mortgage mean it’s no longer affordable for a borrower

What can you do if your application was declined for LVR reasons?

  • Look for a lower value property, so your deposit covers more and the mortgage required is a smaller percentage of its value
  • Try to get a larger deposit together, provided you can afford to service the mortgage required
  • Check whether you qualify for any Kāinga Ora first home buyer schemes

To learn more: See our article on what happens if a registered valuation isn’t high enough

2. Debt-to-income ratio

The debt-to-income (DTI) ratio is an affordability measure. It compares your total debt, including the mortgage you’re applying for, to your income. If you’re applying with someone else, such as your partner, it will apply to your combined debts and incomes.

Debts can include personal loans, car loans, AfterPay purchases, credit card limits and overdraft facilities (even those you’re not using).

If you had debts totalling $600,000 and an annual income of $100,000 your DTI ratio would be six.

The Reserve Bank has been using DTI ratios to keep an eye on the country’s financial stability for some years now. In 2021 some banks started voluntarily using a maximum DTI ratio of six as part of their affordability assessment for mortgage applications. The Reserve Bank has been consulting with major lenders on whether to make it a regulatory requirement and, if so, what DTI ratio to use.

A similar idea, called the loan-to-income (LTI) ratio is used overseas, but it only considers the size of the mortgage, not your total debt. For example, in Ireland the LTI ratio must be 3.5 or less.

DTI ratio limits can lead to a mortgage application being declined when:

  • A borrower’s existing debts reduce the amount a mortgage provider is prepared to lend
  • A borrower’s income is irregular and the lender’s income assessment is lower than expected
  • A borrower’s plans, such as starting a family or taking time off to study, mean their income is likely to decrease in the near future

What can you do if your application was declined for DTI ratio reasons?

  • Focus on repaying existing debts and get rid of unnecessary credit card limits or overdraft facilities
  • Ask for a wage increase, find a higher paying job or move to a role that has a more stable income
  • Look for a lower value property

To learn more: See our article how much income should go to my mortgage?

3. Uncommitted monthly income

Uncommitted monthly income (UMI) rules are another affordability measure. They basically subtract your regular expenses from your total income to work out how much you have left over for mortgage repayments.

Mortgage lenders have always used broad standard assessments for living costs based on each borrower’s circumstances, such as how many dependent children they have. However, the government’s new CCCFA regulations introduced on 1 December 2021 mean lenders must go through your expenses and income in fine detail. They have to record why they decided you could afford the mortgage they provided.

To allow for rising interest rates, lenders always use a higher rate than the current ones when calculating mortgage repayment affordability. It’s reported that some lenders use a rate of 7% p.a.

UMI rules can lead to a mortgage application being declined when:

  • A borrower’s bank statements for the last three to six months show too much of their income is already being spent, even though they plan to cut back on non-essentials when they get a mortgage
  • A borrower has irregular income, such as commission payments or from seasonal work, and the lender’s assessment of income is lower than expected
  • A borrower’s income is likely to decrease in the near future

What can you do if your application was declined due to UMI rules?

  • Develop a six-month plan to cut your expenses and live like you already have the mortgage you want to apply for, with some to spare
  • If you’re renting or already have a mortgage, regularly put the extra needed for your planned mortgage repayments into a savings account to show you can afford them
  • Find ways to increase your income or move into a role with regular fixed wages, but be aware that trial periods probably won’t count as reliable employment

To learn more: See our articles 11 tips for getting a mortgage under the new UMI rules and how do I calculate my mortgage repayments?

4. Bad credit score

In New Zealand, almost everyone over 18 has a credit score and it’s one of the first things a mortgage lender will check when you apply. Your credit rating is recorded when you have a utility or phone contract, credit card or loan of any sort. If you’ve missed payments or applied for credit too often, you may have what lenders see as a ‘bad credit score’.

A mortgage provider is usually lending you other people’s money, so they need to make sure you can and will repay it on time. They also need to be confident that any mortgage they provide is suitable for you and your circumstances. If it looks like you’ve struggled to manage money well in the past your application could be declined.

Three organisations are officially allowed to record your credit history and make it available to lenders, insurance providers and utility companies. You can check their records of your history for free online by visiting Credit Simple or Centrix or My Credit File.

A credit score can lead to a mortgage application being declined when:

  • A borrower forgot to pay some bills in the last five years or so, or has defaulted on a loan
  • A borrower has been using one credit card to pay what they owed on another
  • A borrower has made multiple credit applications in a row
  • Someone, such as a flatmate, was meant to pay a bill that was in a borrower’s name but they didn’t
  • A borrower has been declared bankrupt
  • Someone stole a borrower’s identity and ran up bad debts in their name

What can you do if your application was declined due to your credit score?

  • Check your credit history to see what has reduced your score and put things right if you can
  • Look for any defaults you don’t recognise and may not be your fault, then start the process of having them reviewed by the credit history organisation – this can take a while, so start early
  • Improve your score by repaying existing credit early or not using it all, such as repaying your credit card in full each month
  • Reduce the lender’s risk by finding a lower value property and using the same deposit, then start proving your ability to make mortgage repayments on time, every time

To learn more: See our articles what credit score do I need to buy a house in New Zealand? and buying a house with bad credit: a guide to your mortgage options.

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Murray Joiner
Murray Joiner

Karina Reardon
Karina Reardon

Head of Strategic Partnerships -

Karina has worked in the mortgage sector for the last two decades, and is considered an industry expert. As a content author she has a database of financial advisers who share her weekly commentary through their social and digital channels. A well-respected and popular member of the industry, Karina was recently recognised as one of the ‘Elite women in mortgages 2023’.