New lending rules won’t ‘kickstart’ housing market
A homeowner who is debt free with thousands in monthly discretionary income should not have to jump through hoops to get a new mortgage, but under current lending rules they do.
This is the situation one of the clients of Squirrel Mortgages founder John Bolton. The man owns two properties, and wants to buy another house.
He has discharged his mortgages, is debt free and could buy the new house without a mortgage, but decided he wanted to get some bank lending for the new mortgage.
Bolton said his client is applying for the lending with a bank he has been with for over 10 years, has never missed a payment in the past, and has plenty of disposable income, so he thought his application would be easy.
“Instead he has been shocked, and frustrated by what the application has involved. Affordability is not remotely an issue, and he was good on declaring his expenses.
“But the bank has come back with at least 20 questions requiring detailed information around costs such as his wife’s car parking, and a payment to his daughter.”
The man could not believe it was easier to secure his previous $1.6 million mortgage than it was for him to secure $500,000 for a mortgage now, Bolton said.
Mortgage lending became much tougher to get when the previous government updated the Credit Contracts and Consumer Finance Act (CCCFA) in 2021.
The changes were intended to crack down on irresponsible lending by loan sharks, but reports of people being turned down for home loans based on things like spending too much on a dog, or having been on maternity leave soon emerged.
They came at a time when the Reserve Bank had tightened loan-to-value restrictions, and mortgage advisers described the result as a “credit crunch” which contributed to the slowing of the housing market.
Now, Commerce and Consumer Affairs Minister Andrew Bayly and Housing Minister Chris Bishop have announced the Government is revoking the “overly prescriptive” affordability provisions contained in the CCCFA.
Bishop said the existing rules meant thousands of families who would have previously qualified for a home loan were locked out of the market.
The changes would make the home loan application process simpler for people who had diligently saved to buy a house, he said.
Recent housing data showed prices and sales creeping up, but the market remained quiet. Bolton, who ran a petition to rewrite the lending rules in late 2021, said the changes would be a huge improvement on the existing situation, but would not kickstart the market.
The changes would not make much difference to people’s ability to borrow as the biggest constraint on potential home buyers was currently high interest rates, he said.
“But they will make the borrowing experience much better. While the last government did end up having to soften the rules a bit, and they are no longer at the ‘too many coffees’ level, they remain pretty bad.”
He pointed to the debt-free client wanting to buy another house as a good example, but said the rules, which were “like trying to use a sledgehammer to hit a nail”, were a headache for most of his clients.
“Hopefully, the changes will unwind some of the craziness around home loan applications, but in a broader sense I believe the CCCFA is not fit for purpose generally, and is due a rewrite”.
AdviceHQ founder David Green said the changes should be favourable for the market as they would ensure a better flow of credit, and reduce the time involved with applications.
At the moment, applying for a $20,000 mortgage top-up to redo a roof was treated the same as applying for a new $2m mortgage, he said. “Discretion has been lost because the banks have taken a very conservative approach to the rules, so it now takes around eight hours to assess a loan rather than 80 minutes.
“The changes should enable them to work more quickly, particularly when it comes to smaller loans. Hopefully, it will also prompt all banks to start looking at pre-approvals again, because some don’t now.”
Advisers would be able to work more quickly too as they would not need to gather and submit as much supplementary information, he said.
“But another dynamic at play is that the recent flood of properties on to the market means there is more supply than demand. Those factors will weigh against the impact of the rule changes.”