If you’re looking at getting a home loan or refinancing, the new rules around lending might feel like a bucket of ice water over your head. We all knew lending criteria were about to tighten, but the reality has taken a lot of people by surprise.
As with any other sort of change it helps to understand the whole story, so you can stay calm and make plans to achieve your goals in the new environment. This guide will help to fill in your knowledge gaps, outline the challenges ahead and provide tips for maximising your chances of home loan approval from your preferred lender.
Armed with a new level of understanding, you’ll be ready to talk with a trusted adviser who can help prepare your mortgage application and negotiate the best deal for your goals. To make this easy, we have a free service that connects you with a specialist from our panel of expert mortgage advisers. There’s no charge for their service. They’re paid a commission by the lender you eventually decide to borrow from.
Background to the new home loan landscape in NZ
Several things are contributing to the new home loan landscape, not just the tightening up of lending conditions. In addition to changes to the Credit Contracts and Consumer Finance Act (CCCFA), these factors are at play:
- House prices have been increasing for some time
- Mortgage interest rates are on the way up
- The number of low deposit home loans that lenders are allowed to approve has reduced
What’s the story with CCCFA changes?
The motivations behind the CCCFA changes are honourable. The government wants to help vulnerable people who are trapped in a cycle of debt because they use ‘loan sharks’ – lenders who offer small loans at very high interest rates. The new legislation introduces more responsible practices for lending, to make sure all borrowers can realistically afford to repay their loans.
However the new rules apply to all kinds of lending, not just dodgy lending by loan sharks. Banks and respected lenders are also affected by the changes. Lenders who don’t meet the new requirements can be held personally responsible and face hefty fines. As a result, the rules around checking whether someone can afford a mortgage have become much tougher.
How have lenders reacted to CCCFA changes?
As you probably know, home loan lenders have always been concerned about your monthly disposable income. These days it’s called ‘uncommitted monthly income’ or UMI. If you’ve applied for a home loan in the past, it’s likely you had to present a budget that shows your average outgoings. This helped the lender to work out how much you could realistically borrow.
It’s likely the budget you showed your bank was you on your best behaviour. When you did your own analysis of spending, you might have cleaned up your act a bit before adding figures to the budget. Lenders were aware of this, just as they were aware that taking on a sizeable home loan usually makes borrowers much smarter about their spending going forward.
Now things have gone further than an approximate budget. Lenders have to make sure you can afford the mortgage you want or they’ll get in hot water. So they’re looking at your actual spending over the last three to six months, not just your best-case-scenario guestimates. Under the new rules, they need to prove they took reasonable steps to make sure you could survive increasing interest rates and other financial hiccups without getting into difficulty.
New lending legislation at a glance
Just so you know exactly what has happened, from a legal point of view, here’s a high-level view of the main changes that came into effect on 1 December 2021.
- Lenders’ directors and senior managers need to create and maintain procedures to ensure their organisation complies with the CCCFA. If they don’t, they could individually be fined up to $200,000 per breach or be liable for damages awarded against their company.
- The regulations specify what a lender must find out about when assessing a borrower. To determine the suitability of a loan they need to ask what the loan is for, the amount and the required term. Then they need to assess whether the applicant has enough reliable income to afford the repayments without substantial hardship, which means verifying the borrower’s income and expenses.
- The new assessment requirements are also used for any change to an existing loan, such as a new advance or increased credit limit. So if you want to adjust existing loans, the new rules will apply.
- For each borrower, lenders are required to keep a written record of why they decided a loan was appropriate and the repayments were affordable.
All of this means more work for lenders, so applications are taking longer to process then approve or decline. While the new legislation affects all lenders, they each interpret and apply the legislation their own way. Some will be more pernickety than others.
How the home loan application process has changed
For you, the potential borrower, the changes mean you have to present a lot more verifiable information. Lenders will want proof of income. They’ll want to know how you got your deposit together. They’ll look at bank account and credit card statements to check out your regular outgoings and spending habits. And they’ll be interested in your savings record. You can also expect to be asked about any future plans that could affect income and/or spending, such as having a baby or starting your own business.
This could all feel rather unsettling, but it will be less scary if you’re prepared. You’re asking to borrow a large amount of money, so it makes sense for lenders to know the reality of your financial situation. They don’t want to be fined, just like you don’t want to find yourself struggling to make mortgage payments.
You’ve probably seen news stories about loans that were turned down because the applicants were fond of barista coffees and takeaways. Remember that news channels are always looking for the most sensational stories, so these reports don’t necessarily reflect what’s actually going on in lending circles.
Rather than suggesting some of your spending habits are inappropriate, the lender is more likely to draw your attention to budgeting adjustments that could help to ensure the mortgage you want can be considered affordable. Likewise if a lender asks about your plans for the next five years, they’re not trying to stop you from reaching for your life goals. They just need to understand the big picture, so they can make verifiable decisions about the suitability of a mortgage and its term for your circumstances.
While a lender’s criteria may seem a bit nosy and intrusive, getting it wrong can have a range of significant consequences for both you and them.
11 tips for getting past the new UMI mortgage obstacles
Gather up your verifiable evidence
You need to prove you’re a solid proposition, so that means providing believable evidence of:
- Regular reliable income that will continue into the future
- Sensible spending habits that maximise your uncommitted monthly income
- Minimal or no debt
- Minimal or no credit facilities
- A history of good money management
- A decent deposit, ideally at least 20% of your expected property purchase
Do your home loan homework
If you’re new to the home loan market or haven’t applied for a while, get your head around the different kinds of loans and think about which type or combination might suit your needs. This research also helps you to look clever and informed when you meet your preferred lender.
Figure out how much you can borrow
Before you get serious about a property, it really helps to work out what you might be able to afford. Knowing this upfront will help you to set realistic expectations before you talk to a lender. Affordability is about understanding how much of your income is committed to regular expenses and what’s left for home loan repayments.
To make this easier, check out these handy tools:
To see how various mortgage options might affect your repayments, have a play with this calculator.
Investigate your own credit history
If you’re over 18, you probably have a credit report. It’s one of the first things a lender will check out, so stay one step ahead by getting a free report online.
Your credit report includes borrowing and repayment history, and whether any companies have recorded a late payment in your name. If you notice a payment default that isn’t true, you can try to get it fixed.
For more about credit reports, see our article on what credit score you need to buy a house in New Zealand.
Clean up your debt situation
Pump up your deposit
Having the biggest-possible deposit is your secret weapon in the home loans game. The more deposit money you can scrape together before applying for a home loan, the less risk you will be to your lender. The minimum is usually 20% of a property’s value, although there are low deposit options for first home buyers. See if you can go well beyond the minimum, to improve your chances of loan application success.
Apart from spending less and saving more, here are some strategies for plumping up your deposit:
- See if your parents want to offer you an early inheritance. It needs to be a gift, or it will count as debt and reduce the amount you can borrow. If they’re willing to help you out, they need to declare in writing that the money is yours free and clear. Ask a lawyer for the correct wording.
- See if you’re eligible for a KiwiSaver first home withdrawal. If you’ve been putting money into KiwiSaver for three years or more, and you’ve never owned a house before, you can usually withdraw all but $1,000 of your savings and put it towards your deposit.
- Visit the Kāinga Ora website to see if you qualify for a First Home Grant or low deposit First Home Loan. You might get up to $5,000 towards an existing home or up to $10,000 for a new home or land.
- Audit your possessions and habits, then sell off whatever you don’t need or switch to cheaper alternatives. For example, maybe you could drive a less expensive car, switch your gym membership to home workouts, eat out less and limit your clothes shopping for a while.
- A really good tip that will impress your lender is saving the difference between your current rent and your future mortgage payment. This money can go towards your deposit. When doing this calculation don’t forget the extra expenses that come with a home, like rates and insurance.
Give your income score a boost
To bump up your income, there are a few things you can try:
- If you know that you’re highly valued at your workplace, see if you can negotiate a raise. Prepare your case by noting how long since your last raise, finding out how much your role usually gets paid (hopefully it’s more) and listing the successes you’ve had recently.
- If your job is temporary or you’re on a fixed-term contract, ask for a permanent full-time role. It’ll look better on your application. Remember that a three-month initial trial period is not considered permanent employment, so be sure to factor that into your timeline.
- If you have a side gig and get paid in cash, put the money through your bank account so that it counts as income.
- If you have a boarder or flatmate who pays you in cash, same deal. Make the money go through a bank account.
Get busy with a budgeting tool
Once you’ve boosted your income and shrunk your expenditure, so that you look like an attractive proposition for a lender, capture it all in a detailed online budget. We have a great budgeting tool for this.
Then do everything in your power to stick to your budget. This means post-spending analysis each month, to see if you’re living up to your own expectations. Be sure to keep a note of cash purchases and items that may not be immediately clear from your bank statements. When it’s time to apply for a loan, your lender will want to know about all cash withdrawals and non-budgeted expenses.
Get a mortgage broker to hold your hand
A respected mortgage broker, aka mortgage adviser, can become your mentor and coach through the home loan application process. They know what the lenders need to see if your application is going to be successful. What’s more, they know the various home loan products and mortgage combinations inside out.
Mortgage brokers get their income from lenders. When a broker brings a customer to a lender, they receive a commission. But it’s possible you’ll get hit with a bill if you don’t go ahead with a suitable mortgage that your broker has set up for you. Always ask about this possibility before you start working with a broker. Also ask for full disclosure of what lenders they work with.
Get your documentation organised before you apply
- Note down the home loan amount and type you want and why, so the adviser can verify they’re recommending a suitable mortgage for you and your goals
- Photo ID (driver license or passport), marriage and birth certificates
- A copy of your employment contract or letter
- Recent payslips or bank statements showing income deposits
- Bank statements for the last three months for all bank accounts, including credit cards and loans, and the last six months of statements for loans
- If some of your deposit comes from a gift, you need a statutory declaration saying its non-repayable
A mortgage broker may ask for some other documents too, so it’s a good idea to get your filing cabinet in order now.
Don’t give up if you’re turned down
The proportion of successful home loan applications has fallen from 36% to 30% since the new legislation kicked in, according to data from credit reporting agency Centrix. So you might not be one of the lucky ones…at first.
If your mortgage application isn’t successful, it’s important to understand why. Then you’ll know what needs to change before you apply again. You should also ask where your application was OK, so that you can leave that part alone (if it ain’t broke, don’t fix it!). Typically, you can reapply with the lender that rejected you about three to six months after you were declined.