At the beginning of this year, the media was full of stories about borrowers being turned down for a mortgage because they had gone shopping at Kmart or spent too much on Netflix.
The so-called “credit crunch” was allegedly because of the introduction of new responsible lending rules, which required lenders to be much more stringent about the loan servicing tests they put borrowers through to determine whether they could afford the loans they wanted.
Lenders and some mortgage advisers warned that the rules went too far and meant that borrowers who would have previously been approved, were being blocked from accessing loans due to analysis of their spending habits, rather than their true affordability.
In mid-January, Commerce and Consumer Affairs Minister David Clark announced a review of the changes, which came in with the amendments to the Consumer Finance and Credit Contracts Act. The Ministry of Business, Innovation and Employment said that lenders might have been applying the rules in a way that was more “onerous and restrictive” than expected.
That has led to changes being made, which took effect on July 7.
Now, when lenders ask borrowers about their likely living expenses, and these are benchmarked against statistical data about household expenses, there is no need to also inquire into their current living expenses from recent account transactions.
The requirement to obtain information in sufficient detail would only relate to information provided by borrowers directly.
Lenders would have more flexibility to consider how spending behaviour could change after a loan was taken out and have been given more clarity on when a “reasonable surplus” is required in a borrower’s budget and how that should be set.
Savings and investments do not need to be included as outgoings that lenders must account for when assessing what borrowers would be spending when they had the loan. Lenders have also been given more guidance on how it can be seen to be “obvious” that a loan is affordable.
The Government says this should offer flexibility for lenders, and it should also be welcome news for would-be borrowers.
If you’re considering taking out a mortgage, or refinancing, you might wonder how the new rules affect you. Get in touch with us today and we can explain how they might apply.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.