If you keep up with the news around borrowing and lending, you’ve probably seen a flurry of articles on people who have been caught out by the changes to the Credit Contracts and Consumer Finance Act 2003 (the CCCFA). Among the stories to hit the headlines include the tale of a family who say a $17.50 unpaid library fine stopped them getting a mortgage, the woman who was quizzed over getting her eyebrows waxed before she could get a loan, stories of loans being denied due to money spent on Christmas presents – and even a mother who says she was told she would have to return to work within 90 days of giving birth if she wanted a mortgage. The CCCFA, and how it is being applied, has caused such an outcry in the last couple of months that it is currently being investigated by the Government. The final results of that investigation will come out in April. In the meantime, read on to learn about the rules, why they were introduced and how they could affect you.
What is the point of the new legislation?
Simply put, the CCCFA is supposed to provide some protection to the most vulnerable people in our society by not allowing them to go into debt they won’t be able to repay. Just like most of the other legislation around lending, the intention behind the Act is good: to stop loan sharks exploiting people in a disadvantaged position. Further background to this legislation is New Zealand’s unsustainable housing market, which the CCCFA is slowing down somewhat. Credit reporting company Centrix has estimated lending has slowed down by almost $2 billion since the changes were introduced.
The good news, according to finance regulators, is that the new CCCFA is already proving effective at cracking down on predatory lending practices. Unfortunately, as many commentators are pointing out, some average to high income New Zealanders who wouldn’t be perceived by a person on the street as “vulnerable”, are also being prevented from getting loans and mortgages by this legislation.
Which loans does the CCCFA apply to?
Barring business loans, all loans are covered, regardless of the level of risk. This includes loans secured by an asset as well as unsecured loans:
Home loans
Car loans
Personal loans
Credit card loans
What are the problems with the CCCFA?
The wording of the CCCFA is not unreasonable: it says lenders must inquire until they’re “satisfied” that an applicant can pay off the debt “without suffering substantial hardship” before they grant a loan. There are concerns out there though that lenders, including banks, are interpreting the Act in an extremely conservative manner. Lenders say this is because the penalties for a lender who allows someone who isn’t a suitable candidate to take out a loan are potentially huge, and can be crippling to smaller finance companies. For the first time, directors and senior managers of banks and finance companies will also bear personal liability, of up to $200,000, if the business doesn’t complete their due diligence before granting a loan.
As a result of this legislation, your current spending habits – whether you’re a saver or a splurger – are now being treated by lenders as a reflection of how well you deal with money. There’s an assumption that you won’t be able to easily adjust your spending once you take on extra financial responsibility.
Mortgage brokers say the CCCFA and how it’s being applied is creating a “credit crunch”. Some people are either being denied loans by banks because they spend too much, and others are simply giving up on their application halfway through because they’re unwilling to go through the process of answering detailed and sometimes intrusive questions about their household spending.
Is there any way I can get around these rules?
Not really – the best way to avoid scrutiny from your bank or loan company is to show that you’re a good saver. If you’re in a higher income bracket, for instance you earn over $90,000 or $100,000 a year, you will probably find it a bit easier to take out smaller loans - even if you do like to buy a Lotto ticket and get Uber Eats on occasion, or have a big night out every now and then. Loan companies will still ask you for information on your spending habits, but they’re more likely to weigh up your income vs. your spending and decide in your favour. That said, not long ago a couple who had a combined income of $200,000 were denied a home loan due to spending too much money on restaurant dining.
It’s been suggested by some that you may also be able to make cash withdrawals and use those to buy your cafe lunches and coffees if you want to buck the system. Be aware, however, that overall it’s your saving vs spending that lenders are interested in. If you take out money rather than saving it, you will still be asked how you spend the cash.
How does the bank know how much I spend, and what I spend it on?
Easy: by looking at your bank statements. Loan companies may also ask for a copy of your bank statements, and this is completely legal. Be on the lookout for loan companies who ask for your bank password, however (Better.co.nz is one in the news recently). This is usually a breach of the terms of your bank account conditions– no one apart from you should ever have access to your bank account. If you are defrauded by someone who has your bank password, the bank may not grant you fraud cover.
When does my spending become problematic?
There isn’t really an easy answer, as lenders have quite a lot of discretion in this situation. According to the Act there must be a reasonable surplus in the borrower’s budget – but “reasonable” is left undefined. If possible, you should show that you can save at least some money to put towards a mortgage (or loan repayment) every week for at least three months. If you’re considering a home loan, you may like to talk to a mortgage advisor, to see how you’re doing and what adjustments you need to make.
Tips on saving money for the CCCFA
It’s recommended that if you are looking to take out a loan, you try to cut down on what used to be termed your “discretionary spending” wherever you can.
For many people dining out or getting takeaways might be the thing tipping them into the red, while for others it might be shopping for clothes, sports equipment or gadgets, or keeping up with an expensive gym membership. Unfortunately, sometimes it doesn’t feel fair. Not too long ago a man who spent “too much money on his dog” had the amount he could borrow on his home loan reduced. In yet another article a 21-year-old stopped travelling from Timaru to Christchurch to see his parents in a bid to save for a mortgage.
Think about what you and your household absolutely need to be happy, functional and healthy. Hold off on making big purchases if you can. And if you have debts already, make sure you’re up-to-date with or ahead of all your repayments. Be aware of your credit rating (you can get a credit report for free, it’s a quick and easy way to see how you’re doing). Paying your fines, keeping up-to-date with your debt repayments and not taking out loans unless you really need them, is important to building a good credit rating.
Tips before you apply
Check you have at least 90 days’ worth of bank statements for the account or accounts used to pay expenses from (this could include a credit card too).
Get evidence of your income. This could be in the form of a payslip, or copies of an employment contract.
Record how much you spend in a range of categories, like paying off debts, and living expenses like food, utilities, travel, etc.
Mortgage rates and forecast for the year
According to Canstar, the rate for a 1 year fixed-term mortgage is expected to reach 4.31% by November 2022, about 1.1% higher than the previous year. However, over the next few years the increase will level out and increase more gradually. By 2025 the rate is expected to reach 5.5%.
Floating mortgages are expected to rise about a percentage point to 5.6%, in line with the OCR (official cash rate) increases.
What is a reverse mortgage and how is it affected by the CCFA?
A reverse mortgage is a financing option available to people aged 60 or over: you borrow money using your home as security. The lender gets its money back when your house is sold – usually on your death, or when you go into full-time care.
The CCCFA affects this kind of mortgage too. Under the Act, the lender needs to look at the borrower’s requirements and objectives, and whether the borrower wants to leave equity in the residential premises or other property to the borrower’s estate, as well as the value of the house before granting a reverse mortgage.
Although you don’t have to repay money until your house is sold, the bank does still receive interest on your loan (which is why you can’t take out a reverse mortgage over 100% of your property). So it’s always a good idea to only borrow what you need, and nothing else.
First home grants
Anyone considering purchasing their first home should be aware of the grants available to home buyers through Kainga Ora. They’re termed “first home grants”, but if you’ve owned a house in the past (and don’t have that house anymore) you may still be eligible. If your income is too high ($95,000 for one person or $150,000 for two people) you won’t be able to apply, and you also need to ensure you can provide a 5% deposit before you can access this grant.
If you purchase a brand new home, or land to build on, you will be eligible to receive up to $2000 a year, for every year you’ve paid money into the KiwiSaver scheme. The limit is $10,000. If you buy an existing home, the grant is worth $1000 for every year you’ve paid into the scheme (the maximum is $5000).
Mortgage calculator
There are some great resources out there if you want to do a quick calculation: among them are the calculator at Settled.co.nz. You can also check out the calculator at MoneyHub.
Where to from here?
It looks likely that the CCCFA rules will remain in place in some form into the future. Due to public outcry around the rules as they stand, however, an investigation into them has been fast-tracked, and the first piece of feedback is expected in mid-February, with the final results due in April. Among the questions that will be asked is whether banks and other lenders are interpreting the Act in good faith.
In the meantime, you can take the first steps towards sorting your finances by subscribing to Quashed! It’s a free platform where you can compare and contrast insurance deals out there, schedule a free chat with an adviser, and upload your policies so you can see them all in one place.
