In the surveys I run each month of the likes of mortgage brokers, real estate agents and property investors, I invite respondents to give insight into how their bank is treating them these days. Such information on changes in bank lending policies and willingness is hard to come by, and banks can best be described as black boxes, the inner workings of which the average person has little idea.
Here are some of the key themes regarding bank lending which have come through over the past few weeks.
First, banks have tightened up assessment of incomes, and especially expenses, ahead of the December 1 commencement date of changes to the CCCFA – Credit Contracts & Consumer Finance Act.
Banks have to be able to prove that they have undertaken the necessary enquiries to determine that any sort of consumer credit applicant can adequately service the desired debt and ultimately pay it off. This now involves detailed scrutiny of expenses and an extra buffer of Uncommitted Monthly Income (UMI) than before in order to cover unexpected expenses.
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Some sources of income such as from flatmates, boarders, and renters are being chopped back to as little as 65% of anticipated income for assessment purposes. The scaling back of anticipated rental income partly reflects the progressive removal of ability to deduct interest expense by investors.
Banks are also cutting back, but not eliminating, interest-only loans. Often this takes the form of reducing the maximum time they will allow before principal repayments have to commence.
Older borrowers are being particularly squeezed. Banks have to be able to prove that they have assessed the likely income of loan applicants from stable sources from which loans can be serviced. But for people aged 55 or even 50 years and over, this involves factoring in retirement from perhaps 65 and loss of substantial regular income.
In these cases, even if the debt being sort is minor compared with overall assets, many applicants are unable to get finance – even for a top-up to their existing loan.
Tony Alexander: “Banks are showing little interest in lending where the deposit is less than 20%.” Photo / Fiona Goodall
Second, banks are showing little interest in lending where the deposit is less than 20% of the value of a property as they scramble to adjust to a new rule that such lending cannot exceed 10% of their home loan book. Applicants with small deposits who shop around are finding very little interest from banks in supplying a loan to anyone who is not already a long-standing customer.
Third, one new area of credit cutback is the financing of development projects and off-the-plan purchases. With costs rising so much and delays becoming endemic to the construction sector because of materials and staffing shortages, some banks are withdrawing finance previously pre-approved. Loan applicants have to be able to meet something like a 20% cost overrun as opposed to the more usual 10%, before they will be granted finance.
Fourth, some banks are now applying a Debt to Income test in anticipation of the Reserve Bank eventually using new powers which the Finance Minister has delivered to enforce maximum DTIs. Usually the ratio used is 6 – meaning total debt of the applicant cannot exceed six times their total annual income.
Will these changes and a few others generate a credit crunch which could severely impact the residential property sector (sales, prices, construction), at the same time as restraint will be applied through 2022 and 2023 via higher interest rates? They will work towards slowing things for sure. But we have to remember that banks want to lend money – that is their business.
They will eventually have smoother processes in place for assessing loan applications, and applicants will learn what to expect when they seek extra finance. But for now, if you’ve not applied for extra credit in a while, be prepared for a level of interrogation you won’t have experienced before.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
