ANALYSIS: After nine months of mortgage-lending pain, MBIE has released the CCCFA version 2.0 in an effort to fix the vast issues that the initial regulations brought in.
For those who aren’t aware, the Credit Contracts and Consumer Finance Act (CCCFA) was enacted on December 1, 2021. Meant to target predatory lending in New Zealand, it held the directors and senior Management of all lenders personally and inescapably liable for irresponsible lending practices. However, the generically worded regulations meant that the major lending institutions (i.e., the banks) became nervous about breaching the rules and adjusted their lending policies to a highly conservative approach.
The three most frustrating clauses in the regulations were (in my opinion):
1. Treating savings and investments as ongoing expenses, implying that a new homeowner couldn’t direct regular their savings to paying off mortgage debt instead;
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2. Treating previous spending habits as future spending habits. For example, assuming that if you bought takeaways before owning a home, you would continue to purchase takeaways afterwards; and
3. Requiring the banks to show “sufficient surplus” for lending when there was no clear definition of what was sufficient.
The easiest way to comprehend the profound changes to mortgage lending is to think about the difficulty of getting a mortgage on a scale of 1-10. Before the CCCFA changes, getting a mortgage would have sat somewhere around 6 out of 10. It wasn’t effortless to get a mortgage: owner-occupied buyers still needed a 10%-20% deposit, and investors required a 40% deposit. But the process was pretty straightforward if you had sufficient deposit and enough income to afford a ~6.5% per annum mortgage servicing rate.
Following the CCCFA, getting a mortgage sat closer to a 9 out of 10 difficulty rating. At its worst point, applicants needed to show that they weren’t spending their money on non-discretionary items such as takeaways and coffees for at least three months before applying.
Mortgage Lab CEO Rupert Gough: "Some buyers who were blocked could suddenly find themselves with borrowing capability." Photo / Fiona Goodall
The proposed changes, which come into force on July 7, 2022, have addressed some of the major pain points of the original version of the CCCFA. Still, many industry experts would argue they don’t go far enough. Senior management and above at the banks are still on the hook for any irresponsible lending, and wording around what constitutes a breach is still fairly generic. Initial feedback is that the difficulty rating will ease to 7 out of 10. It won’t be as complex as in the initial days of the CCCFA policy changes, but the banks still have several concerns that need to be addressed.
If you are currently pre-approved for a mortgage, you have a month or two to snap up a bargain until buyers start to trickle back into the market. It’s unlikely to be the mid-2021 property rush. Other factors such as higher interest rates, tax-deductibility restrictions and Loan to Value Ratio limits are affecting the market. But some buyers who were blocked from applying due to CCCFA policies could suddenly find themselves with borrowing capability.
And if your application was deferred in some way in the past nine months, it is time to get a budget together - you still need to show how you will control your spending in the future - but consider reassessing if you can purchase a property in July. You may find the winds have changed in your favour.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
