Less than four months after it was tightened on 1 December 2021, the Commerce and Consumer Affairs Minister David Clark announced changes to the Credit Contracts and Consumer Finance Act. The proposed changes should take effect by early June.
Demonstrating affordability is key
The December changes to the Act requires lenders to follow a robust process to ensure that lending is affordable. The measures were ultimately to stop vulnerable people from being encumbered with unaffordable debt.
You may have seen news stories about people missing out on loans because of spending too much on coffee or takeaways. Potential borrowers have also found that the amounts they were saving each week towards their house deposit were counted as regular outgoings that would have to be included in their budget after their house purchase.
Kiwibank chief executive Steve Jurkovich said mortgage applications had “fallen sharply” in the wake of the law change. However, many other factors have affected the market including increases to the OCR, LVR changes and an increase in house prices and local government rates.
The Government has responded to borrowers and mortgage brokers complaining about new responsible lending rules after being turned down for loans due to their personal day-to-day spending habits by announcing new amendments to the Act.
“The amendments we are making are informed by the feedback I received from banks, other lenders and consumers and sit comfortably within the intent of the Act. These initial changes ensure borrower-ready Kiwis can still access credit while we continue to protect those most at risk from predatory and irresponsible lending,” David Clark said.
A one-size-fits-all approach to lending hasn’t worked so far
Roger Beaumont, chief executive of the New Zealand Bankers’ Association said he’d like to see the new rules work in a way that doesn’t restrict access to responsible lending for consumers who can afford it while ensuring vulnerable consumers are protected from high-cost credit that may not suit their circumstances.
Beaumont said the range of benchmarked expenses was very limited and the regulations still required lenders to gather detailed information on outgoings.
The highlighted credit laws changes and the Responsible Lending Code are still being investigated, led by MBIE and the Council of Financial Regulators, with findings being presented in April 2022.
What are the proposed changes to the Credit Contracts and Consumer Finance Act?
The proposed changes, agreed to by Cabinet, include:
-
- Removing regular ‘savings’ and ‘investments’ as examples of outgoings that lenders need to inquire into when assessing the borrower’s future expenses
- Clarifying that when borrowers provide a detailed breakdown of their future living expenses, and these are benchmarked against robust statistical data, there is no need to also inquire into their current living expenses from recent bank transactions
- Clarifying that where lenders choose to estimate future expenses from recent bank transaction records, they are permitted to obtain information about how their current expenses are likely to change once the contract is entered into
- Clarifying that the requirement to obtain information in ‘sufficient detail’ only relates to information provided by borrowers directly (e.g. ensuring that expense categories on application forms are sufficiently detailed) rather than relating to information from bank transaction records
- Providing further guidance on when a lender needs to allow for a ‘reasonable surplus’ (the amount left over when the borrower’s estimated expenses are subtracted from their income) and how lenders should set surplus requirements
- Providing alternative guidance and examples for when it is ‘obvious’ that a loan is affordable, such that a full income and expense assessment is not required.
David Clark stated that it was also important to note that banks may be managing their lending more conservatively due to global economic conditions.
Whilst these recently announced fixes to responsible lending laws should make it a bit easier to access finance for a new home, we’re still experiencing a credit crunch.
What is a credit crunch?
A credit crunch refers to the reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from banks and other financial institutions. A credit crunch is often the result of a recession, a period when lenders are concerned about bankruptcies or defaults, resulting in higher rates.
How will banks respond to these changes?
As mentioned, global financial conditions are making banks a little anxious. So it’s in their best interests, as well as yours, to stress test your budget to see how you would cope with the higher interest rates that are approaching fast on our horizon.
More challenges lie ahead if you build a new home
If you’re buying a land and house package or building a new home there are additional complications to overcome before you can access the finance you require.
If you’re after a bank loan for a house that you’re purchasing off-plan, other than your deposit, you usually don’t have to pay anything else until the house is completed. Although, there can be key stages when you need to make progress payments.
Your finance could expire before your home is completed
You’ll need to confirm your mortgage finance soon after entering into your new build agreement. However, if you’re not careful, your bank loan may expire before your new house is built. This means you’ll need to reapply for new finance that may not be approved, especially if your circumstances have changed.
We’ve got your back at Carlile Dowling. We can help you negotiate changes to the purchase agreement before you enter into it and include extensions to your finance approval if these become necessary.
What happens if I’m building, but not with a land and house package?
It’s really difficult to access a building loan without a fixed-price construction contract. The problem you face is construction companies cannot provide a fixed price due to supply issues with materials, inflation of material costs, labour shortages and increased labour costs.
Two other serious risks with the ‘build yourself’ option are:
- Your construction project budget blows out.
- The construction company goes under.
Like anything involving money and your future, your construction contract needs to be closely reviewed to protect you as much as possible whilst satisfying your bank so that you can get the finance you need. We can help you understand the fish hooks that might be buried in your construction contract, and add safeguards to shield you from the risks.
If you have any questions or want our help, please contact Teresa Mee at Carlile Dowling on 06 835 9368 or email teresa@cardow.co.nz.
No Comments