Mortgage clampdown
Why you can’t borrow as much
Mortgage brokers say banks are asking for more details about people’s spending habits which is clamping down on how much people can borrow.
John Bolton, chief executive of Squirrel Mortgages, said historically banks in New Zealand had based a person’s ability to service a loan on average household expenditure data gathered by the Government.
But now they were drilling down deeper into people’s actual spending habits and it was reducing the amount buyers were able to borrow.
“To be honest people really don’t know their expenses. It’s been a kind of thumb in the air guess so everything has tended to revert to what is the norm/average for a household of that size.
“What they are doing now is looking more to actual expenses.”
Banks typically requested three months worth of statements as part of a loan application, he said.
In the past this would have been used to confirm a person’s income and any outgoings on debt. But now he said they were looking at the data to see whether a person’s outgoings exceeded their income and what discretionary spending was going on.
Bruce Patten, a mortgage broker with Loan Market, said someone who was approved for a loan six months ago may not get it if they applied now if they could not provide all the right information.
“It is creating a significant reduction in borrowing capacity with a number of people.”
Patten said banks were requiring a lot more detail. Instead of just giving a figure for phone, rates, insurance and petrol, the bank wanted to see the average spend on petrol over the last three months. At the same time they wanted more details on other debt.
Patten said instead of wanting to know about hire purchases, banks wanted to know the balance, interest rate and when it was due to be paid back.
Mark Collins, chief executive of Mike Pero Mortgages, said a spend of $300 a month on things like Netflix, a gym membership, online gambling or gaming, could knock $50k off the amount a person could borrow.
“Even a KiwiBuild home at a maximum of $650k, if you have $50k knocked off because of Netflix it’s quite a substantial amount of money you have to find from somewhere else.”
All three brokers pointed to Australia’s Royal Commission into misconduct in the financial services industry as a driver for the change as well as pressure from local regulators the Reserve Bank and the Financial Markets Authority.
The inquiry revealed in March that Australia’s banks were taking a lax approach to checking people’s living expenses.
The inquiry found banks routinely substituted data based on the Australian Bureau of Statistics’ Household Expenditure Measure (HEM) when customers’ stated living expenses were too low.
Brendan Spoules, a banking analyst at Citi group, said Australian regulators were now asking the banks to ensure they had expense information for 11 categories which was a big change from the haphazard way they had collected information in the past.
In New Zealand the Reserve Bank has also widely talked about bringing in a debt-to-income ratio tool which would limit people’s borrowing ability depending on their income.
Bolton said in the past the rule of thumb was borrowing five times a person’s income with the probability of dragging it up to six times.
But now five times would be “bloody good” and it was normal for it to be somewhere between four and five times a person’s income.
He said that change in affordability criteria particularly affected people in Auckland where a small tweak could have a big impact on what someone could borrow.
Collins said people could make their situation better by clamping down on spending in the six months ahead of a loan application.
But Bolton said he believed it was more important that people demonstrate an ability to save.