As kids we loved to jump through hoops, but as new buyers it’s not much fun at all.
New lending rules have created more hoops to jump through, cut off credit to borrowers who would have qualified only months ago, and generally shrunk the size of loans being approved. The key driving force that is making it harder especially for new buyers are the changes to the Credit Contracts and Consumer Finance Act (CCCFA) that came into force on 1st December 2021.
So what has changed in the CCCFA, and why is it making it harder for new buyers to get a home loan?
We talk about this on our podcast and have written here too.
Looking At The Changes Causing Issues
In the past, the banks assessed a persons mortgage application on their ability to afford a mortgage based on their income, any other financial commitments, reasonable expenses and of course how much deposit they had; hence lending they needed.
The banks had some criteria of their own that they applied including;
- A test interest rate that was considerably higher than the actual home loan interest rates to ensure that you could afford the mortgage repayments if and when interest rates increased. For most new buyers a mortgage was set up over a 30-year loan term and the banks (we all) know that a lot can change in 30-years including interest rates can and probably will increase and decrease a few times.
- Minimum household expenses were applied regardless of what a borrower may spend. The banks ask the person(s) applying to state what they spend and then override those figures with what the bank have determined as reasonable expenses for a given situation. If your stated expenses were higher than the banks figures, then they would use your higher figures; however the banks figures will be used if your stated expenses were less.
- An allowance for uncommitted income – even after applying a higher test rate and a minimum figure for household expenses the banks always had a figure known as uncommitted monthly income (UMI) which they applied to a given loan and it was to make an allowance for undeclared expenses and any unforeseen expenses. Generally they would have a scaled UMI that would increase as your deposit decreased effectively meaning that someone with a low deposit needed a larger income.
Now under the new CCCFA rules the lenders are required to look at your spending in detail during the 3-months prior to your application and essentially decide if you can afford a mortgage based your actual spending.
The lenders are looking a lot more closely at your spending and financial commitments, and in most cases are still applying a higher test rate to compensate for increasing interest rates and still want to see a decent uncommitted monthly income (UMI) too. Banks have generally been considered to be responsible lenders, but they’re being extra conservative in response to the changes with the CCCFA and in some cases are making ridiculous decisions with common sense having left the room.
Mortgage Advisers Navigate Through The Hoops
It has become harder to get home loan applications approved, but now we know what the banks are looking at we can start to present the applications in a better light and with any concerns they may have answered within the applications.
Mortgage advisers cannot change bank policy on things like the test interest rates, minimum household expenses or the way they allow for uncommitted income but can review applications and make sure they are presented in the best way and to the bank most likely to approve it.
There have been different interpretations by the banks on how they should manage applications and therefore often one bank might say “NO” when another bank could say “YES” and with banks constantly changing criteria it takes a lot to keep up with. The banks seem to be constantly changing policy and interest rates.
Whether you are a new buyer or have a mortgage already, an adviser may have the answers that you need.