Check in for credit rehab
The ongoing cost of failing to pay a bill.
PERHAPS it’s a credit card that got out of control, or a missed power bill. If you have a black mark on your credit history, it can make it a lot harder to get a home loan.
Commentators say new rules designed to protect borrowers have made things even harder.
A new responsible lending code came into effect in June to guide lenders on how to comply with the Credit Contracts and Consumer Finance Act. The code requires lenders to prove they have adequately assessed borrowers’ ability to pay, including looking at their credit history.
Lenders are also told not to make claims such as ‘‘bad credit history is OK’’, or imply they will overlook past defaults.
William Cairns, director of General Finance, said the major New Zealand banks had started declining loans for relatively minor issues.
‘‘You get people who have moved flats and didn’t move their Vodafone account,’’ he said.
‘‘They can accumulate three or four of those defaults on their credit histories. Banks are absolutely knocking mortgages back for that.’’
Mortgage broker Glen McLeod agreed it was a tough environment. ‘‘If a client has got any defaults on there it pretty much puts them out of the running,’’ he said.
‘‘It depends on how recent they are and whether [the bills] have since been paid. If you’re trying to borrow at a high LVR [loan to value ratio], forget it.’’
HOW DOES CREDIT REPORTING ACTUALLY WORK?
If you have had a debt go badly wrong and it has ended up with a credit agency, that default stays on your credit file for five years. Defaults under $100 are not listed.
Since 2012, New Zealand has been slowly shifting to a system of comprehensive credit reporting, recording a lot more information about consumers’ bill-paying habits. The major banks, a handful of finance companies and a few utility providers have moved to this system. It is good for those who are on top of their financial obligations but not so great if you struggle to pay on time.
Under this system, anyone doing a credit check can now see the details of people who are often late with their payments to those companies, but do not ever get to the stage of an outright default and might have had a clear record under the previous system.
In general, any type of default is a red flag to a bank.
Lenders said their exact criteria were commercially sensitive. However, one banking source said: ‘‘A small bill may only require an explanation but it is not wise to allow a debt to remain unpaid for so long that it goes to collection.’’
Banks tend to regard debts to financial institutions, credit card providers and utility companies as the most serious.
Broker David Windler, of The Mortgage Supply Co, said; ‘‘If you have a $400 bill to Vodafone, you can usually work around that, as opposed to a large sum owing to GE Money. As soon as you have a debt with a financial institution, it starts to get a bit harder.’’
He said it was useful for borrowers to be able to explain why a problem had happened. If it was due to something that was a one-off, such as a marital split or sickness, lenders would be more forgiving than for people who were serial offenders.
BUT THERE ARE OPTIONS . . .
Adrienne Church, sales director of non-bank lender Resimac Home Loans, said many people gave up on owning a home, not realising they had options.
Resimac offers tiers of rates depending on how dicey a borrowers’ history is. It ignores defaults for amounts under $1000.
It has a home loan rate of 8.59 per cent for people one to two years out of bankruptcy, with up to two months’ mortgage arrears as well as other defaults, if they have a 20 per cent deposit.
Church said that while borrowers were on those higher special rates, Resimac would work to get back to a mainstream rate.
If the borrower met their repayments, the rate they paid would drop by 25 basis points a year until it was back to Resimac’s standard rate.
General Finance offers rates between 10 per cent and 13 per cent to those with patchy credit. However, Cairns said people would usually only be on them for six months to a year. Then they would refinance back to a mainstream bank once their debts were paid and they could prove a payment history.
McLeod said he sometimes dealt with borrowers who had got into trouble with their banks because they missed a number of home loan payments but had not yet got as far as defaulting.
They could not move to a different bank because they did not have a clear six months’ transaction history to show.
McLeod said he would recommend moving to a non-bank lender, spending six months getting on top of their bills and then trying a bank again.
‘‘It’s something you have to deal with on its merits for each one. it sometimes costs to get to that good place but that’s the cost for what they have been through.’’
He said rates for that sort of rehabilitative lending would usually come in between 8 per cent and 10 per cent, although some second-tier lenders charge a fee of 1 per cent to 2 per cent of the loan amount.
WHAT DO BANKS LOOK FOR?
Banks want to be sure that a borrower can meet their loan repayments. Bank accounts tell a story. Lots of withdrawals at a pub in one night often indicates a flutter on the pokies. This is fine – unless it means the account is wiped out or automatic payments bounce. Banks are keen on income stability. If you have just started a new job, you may have a better chance of success if you wait a few months to prove the job is permanent. Moving a lot is also considered a warning sign. Banks are reluctant to lend large amounts on 30-year terms to people who will retire part-way through. If you are 50 and taking out a loan, you will need to prove to the bank you can pay it back before you retire, or have a way to ensure your income will not drop too much.