Crisis on credit: mortgage borrowers fall victim to the law of unintended consequences
Banks are asking increasingly solid questions of future mortgage borrowers, after changes to the law on credit contracts come into effect this month | Content partnership
Jeremy Couchman and his partner bought their first home six years ago. It’s in the Wellington suburb of Northland, where average prices have more than doubled in the six years since the couple entered the market. According to CoreLogic, the median value of the Northland property has fallen from $ 620,500 in 2015 to $ 1.37 million now.
They bought the house the year they returned from London, and Couchman accepted a job as an economist at Kiwibank.
âIf I am to be honest I would say that during that time I have been very happy to be a home buyer because we are seeing tremendous growth in house prices,â he says.
âI think a lot of people would agree with that – it would have been difficult to just sit on the sidelines and watch. This is our first home.
“If I was still a first-time buyer it would have been pretty hard to swallow. And I imagine it was for those first-time buyers.”
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Couchman has a genuine empathy for those trying to enter the housing market, watching the deposits they need to pay out grow faster than their weekly earnings. And, he warns, there’s an unexpected new hurdle.
Changes to the Credit Deeds and Consumer Finance Act that came into effect this month were meant to protect cash-strapped borrowers from the rapacious loan sharks of High St. But some observers argue they have an unintended consequence for those looking to borrow to buy a home.
It comes as borrowing hits all-time highs. The Real Estate Institute reported this week that nationwide median home prices hit a new record high of $ 925,000, up 23.8% in one year. And the average Auckland home is now $ 1.3 million.
Home buyers borrowed $ 7.7 billion in October, according to the Reserve Bank, and first-time home buyers made $ 1.45 billion.
Many of these borrowers appear exposed to rising rates: $ 617 million has been loaned to first-time buyers with less than 20% down payment. This could leave some vulnerable.
Mortgage managers now take a very close look at the spending of potential borrowers and may demand to see statements for all of their bank accounts on credit cards, not just those from the bank lending them the money.
Phoebe Davis, a partner at Wynn Williams, agrees it will be more difficult to get a mortgage, but she says it could be a good thing. âMy professional view is that mortgages are not the target of these legislative changes, but rather to combat the increase in payday loans and high interest financing offers.
“Having said that, this was not an unintended consequence and with rising interest rates it should provide additional security for bank lending.”
She adds: “It is too early to say whether these changes will have a real negative impact on mortgages and therefore on the housing market, and then whether adjustments will be required elsewhere to counter the unintended consequences for those looking to. to borrow. , especially early adopters. “
Others believe the new controls, originally designed to protect vulnerable borrowers, may ultimately restrict the supply of credit to those who need it most.
âFor the banking industry, they may be a bit more risk averse when it comes to lending to people considered a bit riskier,â Couchman said. “And so they don’t lend. So that further restricts credit, in the short term.”
– Jeremy Couchman, Kiwibank
This week on Newsroom, Bell Gully attorneys Sophie East and Richard Massey warned that the changes to the law actually discourage lenders from extending credit to “borderline” applicants who cannot clearly demonstrate they can. comfortably afford a loan.
The changes introduced significant new penalties for lenders who violate responsible lending rules, with new broadly worded obligations that remain unclear in several important respects.
âUnless there are meaningful clarifications on the details of the regulations, lenders will continue to take a conservative approach, to the detriment of poorer borrowers,â they wrote. âThe unfortunate result is that these changes, which were intended to protect vulnerable borrowers from ‘loan sharks’, make it all the more likely that many borrowers will have to seek credit from alternative sources. “
Mortgage managers won’t just be looking at borrower spending. Couchman says they will also continue to monitor earnings and have always looked at job security for people on short-term contracts.
âFor the banking industry, they may be a bit more risk averse when it comes to lending to people considered a bit riskier,â Couchman said. “And so they don’t lend. So that further restricts credit, in the short term.
âBanks need to be confident that applicants can live within their means if taking out a mortgage means they will have to significantly reduce their discretionary spending. Borrowers may need to prove they can before taking out a mortgage, rather than a bank the applicant’s word for it. “
There is also an impact on real estate investors, who are also having their finances taken a closer look. This will include occupancy rates (a key factor in income) and factoring in tax changes around the deductibility of interest payments (which effectively increases the costs of operating a rental property).
Couchman says there is already “pre-application screening underway” as applicants realize the new level of information needed for an application. âWhat we’ve seen is a significant drop in the number of claims over the past few months. But there are several factors that are likely behind this drop, not just the changes in the CCCFA. These include Tighter LVRs, rising mortgage rates, rising test interest rates and changing market sentiment. “
Time will be the test of the extent to which the new legislative changes serve not only as a protection for lenders against over-eager High St lenders, but also as a de facto restriction on debt service for real estate investors and home buyers. House.