The Government’s U-Turn on the Credit Contracts and Consumer Finance Act (CCCFA) may not be enough to help first home buyers, with experts telling OneRoof that the recent loosening of the strict credit rules may be a case of “too little, too late”.
Economists and mortgage brokers claim that buyers who were turned down for finance or approved for much lower amounts as a result of changes made to the CCCFA in December could still lose out because of rising interest rates and higher test rates by the banks.
The average two-year fixed mortgage interest rate in June 2021 was 3.47%, compared to 5.99% at the end of June 2022, which has locked out some buyers who would have qualified prior to the CCCFA reforms in December. Borrowers are now being stress tested by banks at around 7% or more to ensure they can pay if interest rates rise. Some can’t pass this test.
The changes made to the CCCFA in December were aimed at curbing predatory lending in New Zealand, but the regulations, which held the directors and senior management of all lending institutions personally liable for irresponsible practices, pushed banks into adopting a more conservative approach to their mortgage lending.
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Buyers were assessed more harshly than they had been before the changes, with banks treating previous spending habits as future spending habits. Reports soon emerged of applicants being turned down because of what they spent on takeaways and gym memberships. In some cases KiwiSaver contributions were classed as an expenditure.
The changes attracted fierce criticism from mortgage brokers and agents as well from the banks themselves, leading to an announcement by Commerce and Consumer Affairs Minister David Clark that the rules would be reviewed.
The Government has since removed some of the harsher requirements, with the new changes coming into effect on July 7.
Jeff Royle, mortgage adviser at iLender, says he has noticed that the banks have become a little more forgiving of customers’ spending habits. “Three months ago, if somebody’s statements showed unusual [spending] activity, I don't think the banks had a choice but to factor that in. But latterly, as long as there was a reason why, the bank is OK.” He cites the example of a client whose bank statements showed excessive spending on takeaways. “That's because they were remodelling their kitchen. So when we put a story around it, and presented it to the bank, the bank went ‘fine’.”
EasyStreet Mortgages broker Gareth Veale says some banks have thrown off the CCCFA shackles. Photo / Supplied
However borrowers who might have been granted finance in December and January had it not been for the CCCFA are now facing other hurdles such as rising interest rates.
Even clients who can borrow at today’s rates may struggle to settle if rates continue to rise as expected, says Royle.
EasyStreet Mortgages broker Gareth Veale points out that buyers are unlikely to be able to borrow as much now as they would have a year ago.
Test rates have leapt from around 6% to more than 7%. “They have gone up horrendously, further pushing out affordability for home buyers. The next problem is the low or no capacity banks have for lending to people with a low deposit below 20%,” he says.
Veale says some banks have been slow to embrace the July 7 changes to the CCCFA while others “have been quick to throw off the shackles”.
Applicants who are continuing to run into finance problems should use a mortgage adviser to put their case to the bank, he says.
Valocity head of valuations James Wilson says interest rates are having a big impact. Photo / Fiona Goodall
James Wilson, head of valuations at Valocity, OneRoof’s data partner, says it’s too early to see whether the July 7 changes have had an impact. “We haven't seen an influx of new people applying for mortgages,” he says, adding that rising interest rates could be adding to extra caution in the market.
“Interest rates are likely to keep rising in the short to medium term. That is having a big impact on people’s buying decisions.
“When the CCCFA changes were flagged late last year, the market was running hot. Many of the people that were blocked from buying as a result of the CCCFA are unlikely to have been buying in a more cautious market.”
Infometrics chief forecaster Gareth Kiernan says with hindsight it wasn’t just the CCCFA that caused sales volumes to fall from December 2021. “Looking back at that tightening of lending in December and January, it looks to me like the CCCFA wasn't really the main thing driving the slowdown in the market. Ultimately interest rates were the dominant driver.
“So I'm not expecting the July 7 changes to lead to a big improvement in buying numbers.”
Real estate agents are also not yet seeing much of a flow through from easing of the CCCFA. Nicki Cruickshank, sales manager at Tommy’s Real Estate says she’s seeing a few more buyers looking. “But I wouldn't say it's made a dramatic change. We are still way, way down on first time buyers compared to what we should be.”
