What's the CCCFA and how do the changes affect you?

Ask any mortgage broker and they’ll tell you it’s harder than ever to get a mortgage approved right now.

No doubt you’ve heard the same sentiment echoed in the media too. Usually by headlines to the effect of: “Mortgage Declined Because of $187 Kmart Trip”.

Changes to the CCCFA and the Responsible Lending Code came in December 2021, which tightened the rules banks must use when considering those fit for a mortgage.

Some mortgage brokers will go so far as to describe the changes as “extreme” or having gone way beyond a reasonable level.

A few slight amendments to the CCCFA were announced in August. But there is no mention of any large-scale repeal, so the CCCFA is here to stay … for now at least.

So, how are these new lending rules going to affect property investors?

In this article you’ll learn what the changes are, how they can affect you, and what practical steps you can take to have the best chance of getting your mortgage approved.

Do you have a question or comment about the CCCFA? Feel free to leave your thoughts in the comment section at the end of the page.

What is the CCCFA?

The Credit Contracts and Consumer Finance Act (CCCFA) is a law that makes sure people who lend money act responsibly.

That means banks and payday lenders aren’t lending people money they can’t afford to pay back.

The Responsible Lending Code drops out the bottom of the act, and provides more practical guidance to lenders and what they can and cannot do.

This makes sense, right? Banks don’t want to lend $1 million to someone who can’t afford to pay back the loan. Forcing a borrower into a mortgagee sale is the bank’s last resort.

But the recent CCCFA changes have further strengthened restrictions and introduced tough penalties for bankers who lend money to those who can’t afford it.

What is the impact of the CCCFA?

This has reduced the number of mortgages being approved by about 20%.

According to Centrix data, before the changes came in about 36% to 40% of mortgage applications resulted in mortgages being taken out. That’s now fallen to 30% of mortgage applications.

So, while the number of mortgage applications approved has fallen, it’s not dropped off a cliff.

Tell me … what are the changes?

To answer this question we will first outline what the initial changes were (announced, December 2021) before discussing the more recent amendments made in August this year.

This way you’ll be able to make a comparison between the two announcements.

Initial changes

So, when applying for a mortgage, banks will look at:

• Your Income

• Your Expenses

• Your Loan costs

Nothing has changed here. It’s the same as it’s always been.

On top of this banks will test the application to see if you could withstand a higher interest rate, or what would happen if you had less rental income and higher rental expenses.

The main change now is the way banks look at your expenses.

The bank no longer looks at those takeaway coffees, Netflix subscription, or that $200 splurge at Kmart as discretionary. It’s now locked into your spending budget.

Put another way, banks now assume you wouldn’t trim back on any of these spending habits – if you had to – in order to get a mortgage.

Pre-December 1, as long as you had enough money to cover your base needs and the mortgage at a higher interest rate there was a pretty good chance your mortgage would be approved.

Now, banks run your statements through software that scans every item, arranging your expenses into 20 categories. And the assumption is that the way you live now is the way you always will live, even if your interest rate rose.

In real life, if the worst-case scenario happened it makes total sense you would cut back on your expenses to make your payments.

Isn’t this all a bit much?

Well, some mortgage brokers think it is.

And the media is rife with stories of serious borrowers being turned away for the most seemingly ridiculous reasons.

Most of the time these applications come from responsible home owners with solid repayment histories who have never missed a mortgage payment.

For example, there was a couple who wanted an $80,000 loan for urgent repairs on their rental and were questioned about their spending habits at a local dairy.

Or the couple with a $200K combined annual income who were turned away because they ate at too many restaurants.

Really, the whole thing could be seen as a bit of a farce. Because after the 3 months of living like a pauper to get lending approved from the bank, many borrowers will go back to doing all the things they were before.

At the end of the day all this analysis is doing is forcing Kiwis to live a short-term lie, just to get accepted for a loan.

You and I and the banks know you are going to go back to normal once the application goes through.

New updates to the CCCFA

As mentioned, the December changes to CCCFA were openly criticised – by those in the industry, the media, and would-be borrowers.

So news the Government would be announcing further changes to the CCCFA was warmly received in August.

At first mention, this announcement had a lot of investors excited. But the announcement wasn’t a full-scale rollback.

Peter Norris, of Catalyst Financial, says the biggest change was in the supporting documents borrowers need to supply.

If a borrower’s servicing (income) is strong enough, the lenders won’t investigate the borrower’s spending habits line-by-line.

That means banks no longer have to look at your Kmart trips or your coffee habits and lock them into your discretionary spending.

But only if your income is considered strong.

That raises a valid question – how strong is strong?

Well, ANZ reckons if you have an uncommitted monthly income of over $1,000 a month, then you don’t need to provide evidence.

But Peter says the pool of people who have that high amount spare is small, given the current interest rates.

Over the short term these amendments to the rules won’t have much impact.

So, it’s not like the CCCFA is rolling back completely.

For instance, the banks are still significantly reducing the amount of collected rent versus being actually used in uncommitted monthly income calculations.

So, it’s still important to keep tidy spending habits in the lead up to any mortgage application (more on this below).

What can I do to give my mortgage application a better chance of success?

Well, it doesn’t mean you have to live like a pauper for three months. But some lower-income borrowers will need to.

When you apply for lending the bank asks you for 3 months of bank statements (and 6 months of credit card statements) from your accounts.

So, the best thing you can do is live as if you already have that mortgage, and paying a higher interest rate.

Put the loan you want to take out into a mortgage calculator and set the interest rate to 8%. That’s what you’ve got to be able to afford. And you need to live as if you were already paying that.

For example, if your mortgage is $600,000 and your interest rate is 5%, you’ll actually pay $743 per week.

But, if you live as if it were 8%, you’re looking at $1,015 a week. That’s a significantly higher mortgage payment of $272 a week.

If you’re not already putting aside $272 into a savings account, it’s time to start for the next 3 months. That may mean cancelling all the things you’ve heard about in the media. Things like Netflix, Disney, Neon, takeaway coffees, restaurant visits … some would-be borrowers will need to sever the whole lot.

But just bear in mind mortgages are still being approved. Only marginal borrowers will need to go this far.

What other options are there for me?

If you can’t get a loan from a bank, a non-bank lender may be the right choice for you.

Non-banks do come with extra costs and higher interest rates, but investors now weigh these extra costs against the alternative … which is not getting a loan at all.

If you’ve recently been declined a mortgage and are contemplating turning to a non-bank, this article will break down our picks for the top 5 non-bank lenders in the country.

Is this going to be the new normal?

People in the biz reckon it’s likely these new regulations will be loosened in time. And there is optimism that common sense will prevail.

There has been a lot of backlash from people in the industry calling it ridiculous, and government ministers admit that perhaps the regulations have gone a bit too far.

So, while it may be tough to get lending now in September 2022, it might not be the same case in 3 to 6 months.

The good news is that borrowing hasn’t completely halted. The banks are still lending and they will continue to lend.

But you do need to be aware of what banks are looking for and behave in a way to position yourself in the best light.

This is when you’ll want to work with a clued-up mortgage broker to help get your mortgage application through the bank. If you’re looking for a recommendation, Catalyst Financial, our in-house mortgage broker, could be worth talking to.

Write your questions or thoughts in the comments section below.