Money – Mortgage application declined?

I have certainly seen a tightening of the banks’ criteria over the past 12 months. Firstly we have had the introduction of the responsible lending code. This piece of law was primarily introduced to make it harder for loan sharks and pay day lenders who lend money at horrendous interest rates to be in business. While it has placed some tougher law around the consumer credit market, and some resulting penalties for lenders who don’t comply, it has had some unintended consequences for those who are wanting to borrow from the banks for legitimate and sound reasons. The policy-makers at the banks have taken the law too far in my opinion and now decline loan applications which are sound and would certainly have been approved prior to this law being introduced.

The debt servicing test requirements now in place are onerous and confusing to borrowers, to say the least. The code aimed to ensure that lenders only lent money to those who could afford to make the payments and that any contract would not put undue hardship on the borrower. Banks always take an over-the-top approach to any new laws and the result is that borrowers are being put through an income vs expense test, which runs the magnifying glass over their spending habits. If the bank doesn’t like your cash management skills, then you are usually declined. However, as we all know, a one size policy never fits all and the way in which lending proposals are being assessed now is too rigid.

For instance, if you live a frugal life and keep your expenses low the bank will not take as gospel what you say you spend but instead will assess you against the Consumer Price Index for living expenses and use this for assessing your loan, in many cases these are much higher than what you may actually spend but the higher figure is used, with the result you can borrow less. All the lenders assess loans differently and what you can borrow at Bank One can be totally different at Bank Two. A recent loan application which was presented to two of the major banks had an overall $150,000 difference in what they would lend – same people, same income, same expenses and yet the way the proposal was assessed had a whopping $150,000 borrowing difference.

Add to this the recent LVR changes which require a 20% deposit for all owner occupied mortgages and 40% for any rental properties, and the home ownership equation has got a whole lot harder for Middle New Zealand. The restrictions which have been put in place for investors won’t make one bit of difference in my opinion, as the people who are buying investment property usually have more than 40% or, in the case of foreign buyers, don’t need to borrow at all. The shining light in all this is that as the banks appear to be shutting up shop, the non-bank mortgage market is quickly gaining pace with a number of new entrants and new products being available. Although they are slightly more expensive, they can still lend to 95% for first home buyers and 90% for investors in most cases, as they are not bound by the reserve bank rules.  I expect that over the next 12 months that non-banks lenders will account for 30-plus per cent of the market and pick up where the banks have left off. A good financial advisor can assist with access to these products.