Changes to the Safe Lending Act are wider in scope than mortgages
David Verry is a volunteer financial mentor with North Harbor Budgeting Services. He spent 30 years in corporate and institutional roles in some of Aotearoa’s leading banks.
OPINION: I’ve been following the media with interest recently, as Netflix subscriptions and shopping at K-Mart have reportedly led to mortgage applications being turned down.
The blame was largely attributed to recent changes to the Credit Agreements and Consumer Credit Act (CCCFA) and clearer requirements regarding affordability assessments.
Perhaps banks are using the need for more detailed affordability assessments (using actual spend, not a model’s) as a reason for declining applications, when in reality the loans don’t match to a rising interest rate market.
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* CCCFA rules are bad, but they’re slowing ‘abnormal’ rise in home loans, economist says
Frankly, the past few years have seen a downturn in the interest rate market, and borrowers have taken full advantage of it (as I would have).
I have sympathy for those who work hard to get their first home (which most likely involves a mortgage) and everyone else too.
House prices are still at high levels and interest rates are rising. There is an even greater need for lenders (and borrowers themselves) to take a hard look at spending and determine if many can afford the substantial debt they are taking on.
Reserve Bank analysis has shown that if mortgage rates rise to 5% (two-year fixed rates are already just below), nearly 20% of first-time homebuyers will face mortgage problems. maintenance… at 6%, it would increase to almost 50%. percent and also include existing owner-occupiers and investors.
No wonder banks are testing mortgages at 6% per annum – at such levels many will not be able to afford the mortgage they want.
Combined with the global uncertainties, maybe this stuff will finally stop house price increases…as many people have been striving to happen.
It is important to note that not everyone who comes to a financial mentoring service faces financial hardship.
About 10% of my clients simply want to save more (often for a security deposit), pay off modest debt (if any), and organize their affairs to better prepare for the future.
We often advise those saving for a security deposit and we usually discuss some of the little things, but this is to emphasize the number one priority.
Pay off other debts, increase your cash flow by controlling your expenses or increasing your income (roommates, weekend work).
Get your house in order long before you apply for that mortgage because banks and brokers are now jumping on the bandwagon to that. This has always been our mantra.
I recently took in a family that is not experiencing any financial difficulties. They have a decent combined salary and are considering how a rise in interest rates on their mortgage will affect them.
They are very worried about where things might go, but have reasonably started to focus on having to batten down the hatches with where things might be in 12 months (many borrowers won’t until the proverbial doesn’t). will not have reached the fan).
While I agree that the banks have been in a vastly better position to assess whether they should lend money in the first place, it is unfortunate that it is only the CCCFA legislative changes that are largely responsible for making mortgages still more difficult to obtain.
I would say they are in too conservative mode as they adapt to changes when we would just like lenders to reach a minimum or acceptable standard of responsible lending.
As a financial mentor, I’m glad most lenders have taken the changes to the CCCFA seriously.
There is nothing theoretical about dealing with people who are unable to pay their bills and default on loans that lenders should never have approved in the first place.
In fact, requirements flip the model – a full budget based on actual costs (practical), not just the financial institution estimating large numbers (theoretical), is definitely a better model.
While this means more work for lenders and brokers, it should mean fewer defaults, cancellations, restructurings and resolutions on the other end if things go wrong.
A Mortgage Broker Says His Client Isn’t a Vulnerable Borrower…try asking him this question if he just lost his job, saw his pay cut, his employer went out of business or s he needs to reset his interest rate. double what they started with.
The reality is that many of us are one payday away from not being able to meet our expenses.
Most people with debt – and that includes mortgages – don’t have a readily available stack of cash to pay them off if their income stops or dips.
The true benefit of the legislation may not be evident for a few months, but I am confident that the good stories such as fewer requests for financial mentoring, fewer bankruptcies and fewer hardships for families will start to materialize.
If financial mentors can see a reduction in the number of customers in default, that will be a major step forward and the legislation will have worked from my point of view.
There have been major crackdowns on truck shops and payday lenders over the past two years, which has improved the situation for highly vulnerable borrowers under the reforms.
We hope lenders who buy now and pay later will also be included. These can do as much harm as a credit card or personal loan without an affordability assessment being undertaken.
I won’t even begin to comment on financing, often on credit cards and personal loans – where clients have no assets to show for what they borrowed for.
Auto finance has also been one of the hottest topics for finance mentors recently. We sincerely hope that some lenders, with unfair practices and who really prey on the vulnerable, find the changes too much to handle and close shop.
All in all, I hope the new legislation will put me out of my role… big chance of that! However, I hope this is another step in reducing the financial and mental stress that so many people suffer from.
If you or someone else needs free, confidential personal finance assistance, contact the MoneyTalks helpline on 0800 345 123. They can put you in touch with a local finance mentor (such as David Very).