What to do when your mortgage application is declined

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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 an 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.

Everyone’s situation is different, so in this article we explore the main reasons mortgage applications are declined. Then you’ll see some additional reading based on a range of buyer situations. We want to help you find the information and ideas you need to come up with a winning strategy.

Understanding why your mortgage application was declined

The first step is to find out why your 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.

Here are the four main reasons why lenders decline mortgage applications.

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
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?

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
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 history 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

Further reading to prepare you for next time

Knowledge is power, when it comes to getting a mortgage. The more you know about home loans and the process of getting one, the better. Since this site launched in March 2021, we’ve assembled a library of guides and articles that will help you to understand the home loan landscape in New Zealand. You can link to these resources below.
Getting help to get a mortgage

In recent times, having an expert coach to help you through the mortgage application process has become commonplace. The new UMI rules are throwing a spanner in the works for many would-be borrowers, so more people are calling on the services offered by mortgage brokers (aka mortgage advisers).

  • We’ve written a guide called what does a mortgage broker do? It explains the role of a broker, the pros and cons of working with one, and how to make a choice.
  • You can also check out our article about who pays a mortgage broker. This is a transparent look at how brokers get their income.
  • If you want to work with one of the best mortgage brokers in New Zealand, take a look at our find a mortgage broker page. Complete a simple questionnaire and gain access to our elite panel of advisers.
Mortgages 101

Even if you’ve decided to work with a mortgage broker, it’s smart to update your knowledge about mortgages. Conversations you’ll have with an adviser or a lender are much easier when you know what’s what.

Types of home loans

These days there’s a full menu of home loan types and variants to choose from. You might want just one or you could go for a combo, to minimise interest or maximise flexibility. Our resources will help you to understand every flavour of loan.

First home buyers

Buying your first home is a major life achievement. Like the other things you’ve worked for, it requires careful thought and planning. Several of our guides and articles are targeted directly to first home buyers.

Self-employed borrowers

If you have your own business or work on a freelance or contract basis, the requirements around proving your income and looking attractive to a lender are different. Our guide how to get a mortgage when you’re self-employed talks about how to prove your income and the benefits of approaching non-bank lenders.

Getting a loan for a new-build

When you’d rather build a new home than buy an existing dwelling, the home loan process is different. We have four articles that will help you to get up-to-speed on buying land and taking the new-build route.

Investing in property

Owning more than one property is how many Kiwis get wealthy. While the market has fluctuations, long-term property investment is usually a reliable path to improved net worth. But success often depends on the decisions you make while putting together an investment property portfolio. We have several guides that can help you to make smart choices.

Accessing equity in your home

Many Kiwis find themselves in an ‘asset-rich income-poor’ category, especially as they get older. It means you have lots of money (equity) tied up in your home that can’t be accessed for everyday use. If income is becoming a challenge and you want to release some equity, you can consider getting a reverse mortgage or refinancing your home. To find out more, check out the articles and guides below.

Mortgage housekeeping

To round things off, we recommend thinking ahead to when your loan application is approved. Then you’ll move onto new challenges, like paying your loan off faster, re-fixing, reducing payments if you’re in a jam and finding money for an emergency. Take a look at the resources below.

To learn more

Visit our Learning Centre to see all our guides and articles.

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand mortgages and home loans sector. Nothing in this article constitutes a recommendation that any strategy, loan type or mortgage-related service is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

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