New credit rules to make mortgage top-ups harder

Mortgage borrowers planning to whack their next holiday or car on the mortgage could be in for a rude awakening.

New consumer credit rules on loan affordability and suitability that come into effect next month will make mortgage top-ups more difficult. They could also affect new mortgages for some buyers.

The most at risk are recidivist borrowers who repeatedly put holidays and cars on the mortgage or refinance credit card debt, says John Bolton, founder of Squirrel mortgage brokers.

“It’s the people who say, ‘I just want to add another 20 grand to my mortgage for this year’s holiday’,” he says.

That’s the sort of thing that will get captured by the Credit Contract and Consumer Finance Act regulations, he adds. “It’s going to be a nightmare.”

Advisers will be given long lists of questions by registered banks and other lenders for clients to answer to ensure no one is papering over the gaps.

Changes to both the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and its accompanying regulations mean that:

• There will be new minimum standards for assessment of affordability and suitability of the loan and borrowers’ ability to repay loans.

• Directors and senior managers at lenders and advisory firms must exercise due diligence to ensure they comply with the rules.

• Those that don’t could find they are no longer deemed a fit and proper person by the Commerce Commission.

Geoff Bawden, mortgage adviser at Bawden Consulting, says the new rules will be a shock for some borrowers, with mortgage approvals moving from a formula approach to a more individual assessment. “It’s not just ‘here’s a list of my expenses and take it at face value’. It’s a new level of disclosure and we’re just going to have to get used to it,” he says.

It’s one of a series of shocks that have hit borrowers in the past year as the lending environment gets progressively tougher.

Bawden says the banks have also invested heavily in software, which enables them to drill down into customers’ spending. “They will see how often you go out to dinner (and so on). They’re not just looking at those traditional fixed expenses, they're actually looking at your spending habits.”

When clients come in for a mortgage top-up, they have often taken on more debt or ramped up spending since last time. Under the new rules they’ll have to explain why, he says. “The classic thing is people have a whole heap of new outgoings. They have HP, a GE interest-free card, Afterpay.” The new rules are very prescriptive, says Bawden, and the lenders need to know all that detail and more.

The lender will also require more documentation, says Bolton. For example, if you want to extend the mortgage to cover a new kitchen, bathroom or extension, the lender is going to want to see quotes. Homeowners can’t just throw a few grand extra on the mortgage for other purposes.

“It’s going to be a bit more of a nanny state,” says Bolton. “[Homeowners] aren’t going to be able to do what they want, when they want. They’re going to feel like they’re answering to someone else.”

Even if the lender doesn’t say “no” it might add additional mortgage criteria such as requiring that the new portion of the loan needs to be paid off in three years, not over 25 or 30 as many homeowners do with their top-ups.

The rules are designed to protect borrowers from unsuitable or unaffordable credit, but Bolton say they focus too much on high cost consumer credit contracts. “It’s often not fit for purpose. That’s my opinion. It’s been written to address those dodgy trucks that drive around selling people stuff at over-inflated prices on finance, and payday lenders. That’s what it’s designed for. But the unfortunate by-product of CCCFA is that it extends all the way through to residential mortgages.”

He adds that in the digital age it’s surprising to see more and more compliance and paperwork being added to the process.