Getting a mortgage in 2022 – what you need to know
You may have heard that banks have been tightening their belts but why has this happened and what can you do to give yourself a fighting chance at being approved for a home loan?
On 1 December 2021 changes to the Credit Contract and Consumer Finance Act (CCCFA) were introduced requiring lenders to ensure that anyone they offer loans to, can reasonably afford to pay the required repayment. Where lenders used to be able to use generalised calculations based on income and living costs, they are now required to strictly assess each person’s spending habits to decide whether or not they will be capable of repaying their loan. The changes also introduced a personal liability of the lender’s directors. Should they be found to have not followed the new lending guidelines, they can be personally liable to pay penalties of up to $200,000.
The intention of the changes is to protect vulnerable borrowers from untrustworthy lenders but has resulted in banks becoming ultra conservative resulting in many people being turned down for loans that they traditionally would have been accepted for. Fortunately, there are many high-profile ministers such as Commerce and Consumer Affairs Minister David Clark and ACT leader David Seymour who are calling for an inquiry into these unintended results of the changes so here is hoping there will be a smarter resolution in the near future. However, for the time being we are hearing the horror stories of people being turned down for spending too much on take aways, amongst other things, and it appears to be unlikely we will be seeing any drastic changes anytime soon.
Mortgage Adviser, Martin Clark of Clark Lending Services Ltd has advised that another situation affecting borrowers is the re-instatement of the Loan-to-Valuation (LVR) restrictions by the Reserve Bank meaning that most lenders are requiring a 20% deposit for existing houses as the lenders are restricted on the amount of lending they can offer. He did say, however, that lenders are slightly more open to Low Equity Lending (10 -20% deposit) for new builds as these are exempt from the LVR restrictions. If you are a first home buyer and are struggling to get the 20% required for a deposit, do look into how Kainga Ora may be able to assist you.
So how do you prepare your financial affairs to ensure your best chance at securing a mortgage in these current conditions?
Budget, budget, budget! You will need to review every aspect of your spending. The bank will be scrutinising your financial position and spending habits so you will need to closely monitor your accounts. Look at your fixed costs (rent, set repayments, insurance) and your variable costs (food, entertainment, clothing etc). See if there is room to cut back on non-essential spending as much as possible. The bank will want to see that you have a surplus of funds available after each pay to show that you are financially disciplined.
Lower existing debt as much as possible – ensure you are paying off as much debt as possible and make payments on time as to not adversely affect your credit rating. Avoid short-term finance deals such as BuyNowPayLater or Afterpay.
Mortgage Advisor Laura Carter of the Mortgage Girls advises “It is important that you can prove to the Lender that you can comfortably afford the repayments on your new lending. A good start is to work out how much your approximate mortgage payments are, plus rates, insurance and any other regular costs then ensure you are putting that aside each week. Rent can be included in the “money set aside”. Lenders will be looking at your spending/saving patterns for the last three to six months, so you will generally need to demonstrate you can afford repayments for at least a three-month period before applying for a loan.”
My advice is to not fall into the trap of thinking it is unreachable for you to obtain a home loan. Get in contact with a good Mortgage Broker, they are the experts in this field and will guide you through the mortgage process. We are spoiled for choice in Christchurch with some great mortgage brokers. Should you require an introduction to a Mortgage Broker, please do not hesitate to advise.