What has changed?
Changes to the Credit Contracts and Consumer Finance Act (CCCFA) intensified financing restrictions. Lenders are now required to gather and check more information about borrowers and their spending before granting a loan.
The new law makes directors and senior managers personally responsible for ensuring employees and agents follow compliance procedures and can face fines of up to $200,000. So, all lenders, including banks, have no choice but to be ultra-conservative with all new borrowing, including new mortgages, top-ups, credits cards, and consumer loans.
Lenders must also keep more extensive records of their suitability and affordability inquiries and lending decisions.
Why were the changes introduced?
The Government has made law changes to protect vulnerable Kiwis dragged into extreme debt by ever-growing accumulated interest. And so, the policymakers created new lending rules to ensure that people's borrowing matches their needs.
Designed really for high-risk consumer finance, the legislation has unintended consequences on the first-home buyers.
Unexpected and undesired effects on first home-buyers
Lenders now need to collect a lot more information from customers about their financial situation. They look into a range of expenditure categories like paying off debts, food, utilities, travel, etc. Lenders need to work out if customers have a 'reasonable surplus' left after paying their expenses to cover their loan repayments.
Increased scrutiny makes it harder to secure finance for "non-standard" borrowers, such as self-employed and individuals going through significant life changes, such as expecting parents, families going through a divorce or people approaching retirement.
Bridging finance applications will also be affected and harder to get.
Stringent lending criteria leads to lower approval rates. Higher compliance from banks makes the process of getting funding extremely slow. A complete application is required for top-ups or changes to existing loans such as going interest-only.
How do these changes affect investors?
Banks have updated credit policies and procedures to account for many recent changes, resulting in more in-depth checks and higher approval benchmarks.
Loan-to-value restrictions (LVR) were only re-introduced on November 1 2021, requiring most investors to have a 40% deposit to secure a property.
But the CCCFA changes do not apply to business and investment loans.
What the future holds
Since the introduction of the CCCFA changes in December, many people have come forward saying their loan applications were rejected due to their spending habits. The Minister of Commerce and Consumer Affairs David Clark is calling for an investigation to check if the banks are implementing new rules as intended or if they are adopting too hard a line.
In the meantime, borrowers are turning to non-bank lenders for alternatives. Non-bank lenders are reporting a surge in mortgage inquiries in the wake of new lending rules, even though they tend to offer higher fees and are also covered by the CCCFA.
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