CCCFA: You won't get a home loan by living on two-minute noodles

ANALYSIS: As information around the regulatory debacle that is the Credit Contract and Consumer Finance Act (CCCFA) becomes clearer, buyers are adjusting their spending habits so they can still be in with a chance to get a mortgage.

The new act puts in place strict rules for lenders when assessing a mortgage application. Potential borrowers are finding that can improve their chances of getting finance by reducing their expenses, but stories of “living like a hermit” and “mainly eating cheap white bread” are emerging and not all are successful.

In a more sane lending environment (i.e. prior to December 2021), there was a realisation that everyone, even those on a budget, spends money differently. Some spend more on their grocery shops but may not spend as much on entertainment. Others may choose to spend money on their fitness (gyms, supplements etc.) and not spend as much on new clothing, for example.

Whichever way you sliced up your budget, the banks generally had their own base amount that a “typical” household could live on in a month. This amount varied depending on whether the borrowers were single or a couple and how many children they had but largely the lenders worked towards a general monthly figure.

But the CCCFA requires lenders to compare borrower’s categorised expenses against “reasonable statistical benchmarks”. That means the world of pooled expenses is gone (for now) and, importantly, you can’t game the system by living on two-minute noodles. Even if you manage to live on $100 per month groceries bill, the bank will set a minimum monthly spend for your food that is considerably higher.

I want to be very clear about the message here: potential home buyers gain nothing by living on an extreme budget. The only likely outcome of living on a nutritionally-deficient food budget is an increased likelihood of illness leading to days off work and therefore reduced income (and that’s about the limit of my knowledge on food nutrition).

Rupert Gough: "Potential home buyers gain nothing by living on an extreme budget." Photo / Fiona Goodall

Dig a little deeper into the expense category benchmarks and you’ll start to see some of the other problems that are arising from the CCCFA. A couple may only spend $20 per week on childcare with help from other family members, but a reasonable benchmark for childcare could be as high as $100 per week. The banks are forced, therefore, to push this family’s budget up from the stated amount with very little flexibility for rational decision-making.

And a lot of the issue with the CCCFA is that there’s no definition of “reasonable” when it comes to the banks picking a benchmark. The only way a lender can know a benchmark isn’t reasonable is in the future when something goes wrong and the banks (or rather, their directors) are required to pay large fines. This is why the banks have swung so far into the conservative range for expenses. They simply don’t want to have any feeling of being too risky with their expense assessments.

So what can borrowers do? Unfortunately, there’s no point in asking what the benchmarks are for each expense category (food, entertainment, childcare, utilities etc) and working a budget towards that exact figure. The categories and their benchmarks vary from bank to bank and for each family’s situation. The only possibility therefore is to keep budgets realistic, don’t overspend on discretionary spending and don’t make any expense reduction so extreme as to be unhealthy or dangerous for you and your family.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.