Welcome to our Channel this week.

In the past, multiple clients asked me the same question: If I don’t have much income, but I have a property that has significant value let’s say one million dollars as security, can I still borrow from banks to buy another property?

The answer is obviously no. It is because the banks have to ensure compliance with a financial regulation called CCCFA which aims to protect vulnerable consumers from harm arising from problem debt.

Recently banks are working on a number of lending policies to comply with the upcoming amendments to CCCFA.

Today we are going to talk about what is CCCFA, and what the major changes banks are making, and what impact your borrowing capacity is.

What is CCCFA?

CCCFA refers to the Credit Contracts and Consumer Financial Act, it is a consumer law that aims to protect consumers. When you borrow money, the CCCFA ensures you are able to make informed choices, know what you're agreeing to, and can keep track of your debts. Under the CCCFA, banks are not allowed to force borrowers to pay off the loan which they cannot afford.

Therefore, go back to the case above. If you can’t prove you can service the loan, despite you have a one-million-dollar property as security, therefore, the risks to the banks are very low, the banks cannot approve the loan to you as it will breach CCCFA

From the case, we can see how the CCCFA regulates banks and how it influences the loans.

Now, let me show you how the CCCFA amendment bill impacts our loans, and how you need to prepare for it to minimise the impact.

CCCFA will make it harder for people to get loan approval?

There are five major impacts for consumer loans from CCCFA new regulations:

1. Reducing rental income shading

According to the new government policy, from the 1st Oct 2021, the interest for investment properties loans can no longer offset the rental incomes for those properties purchased on or after March 27th. As a result, investors have to pay more tax therefore their the actual cash flow from property investing will be decreased accordingly.

Previously, some banks applied as high as 85% shading on your rental income. This means if you receive $600 from tenants as weekly rent, the banks would recognize your net weekly rental income as $600×85%=$510.

But now, to comply with the CCCFA regulation, most banks have decreased the shading. ASB has the lowest shading of 60% currently.

As a result, in banks' eyes, your net rental income becomes less, so your servicing ability decreases. It creates a negative impact on your borrowing capacity.

2. The calculated repayments of the existing loans increase

If your loan only has fewer years left, or it’s on interest-only repayment, we used to have ways to help you reduce the impact of these loan structures, when it comes to borrowing new money by choosing the right lenders.

However, the CCCFA regulation requires the banks to be responsible for borrowers. As the result, the banks all have to take into account the actual remaining years of the loan and the repayment type.

For example, if your home loan only has ten years left, your repayment amount should be calculated according to ten years rather than thirty years as it used to be.

For the clients who have interest-only loans, some banks used to add a small margin on the actual repayment amount in the past. But now, the repayment amount will be calculated based on loan term minus interest-only term. As a result, the calculated repayment will be much higher than using the previous method, and your future borrowing capacity will be reduced.

3. A higher test rates for first home buyers and investors

Banks use test rates rather than actual home loan rates to evaluate a client's repayment capability. The test rate is an interest rate that is much higher than the actual one. To use the test rate is because the banks provide clients with long-term loans for decades. During the repayment period, the interest rates may continuously fluctuate. To reduce the repayment risks, the banks have to make sure the clients can still repay the loan even if the rates going up. Currently, the test rates are around 6% to 7%.

Under the new CCCFA regulation, most banks increase their test rate, as the result, your borrow capacity will be decreased.

Among them, Westpac is the only bank that decreases the test rate recently. Westpac becomes a very popular bank for first home buyers or first-time investors as they are likely to lend the most. But this does not mean Westpac should be the right bank for everyone. To make an informed decision, you will need to consider a number of factors and we can certainly help you with that.

4. Credit cards, store cards and Buy Now Pay Later have a bigger impact on your borrowing capacity.

In the past, when you used some credit payment methods such as credit cards, it will not cause any impact on your borrowing capacity as long as you pay it off every month on time. And then the policy was changed. It does not matter whether your credit card is paid off, most banks apply 3% of your credit limit to your monthly expenses.

Under the new CCCFA regulation, many banks have increased the percentage to as high as 5%. As a result of this change, your servicing ability will decrease.

Apart from credit cards, other credit payment methods such as Buy Now Pay Later such as Afterpay, and store cards such as farmers card, purple card, etc also have an impact on borrowing capacity

Therefore, if you are planning to borrow money, it is good to keep the credit limit at a suitable level and say no to the limit increase.

5. Your living expenses are more scrutinised

CCCFA requires the bank to become a responsible lender, so the banks will review your expenses more carefully and make sure you can still afford loan repayment while maintaining your current lifestyle.

Banks will work out the minimum living cost based on your income and family structure (such as how many children and adults)

If your actual living expenses are lower than the bank's estimated minimum standard, the bank will still use the minimum. But if your actual living expenses are higher than their minimum, then the bank will use your actual expenses.

Therefore, the more you spend in daily life, the less you can borrow. You can find more information in our previous article: Five Tips that new home buyers have to know

As the result, we strongly recommend you pay attention to your living expenses over the last three months or longer before applying for a loan. Moreover, if you are applying for a loan from your own bank, the bank can see all your past transactions, it is better to start watching your spending as soon as possible.

The five points are some of the major impacts banks have made recently to comply with CCCFA regulations. I hope the content of this issue will be of any help to you. If you have any questions please feel free to contact us so we can help you with personalised advice.  

Read more:

Three tips to help you improve tax efficiency under the new interest deduction rules

Five Tips that new home buyers have to know

How loan goes during a lockdown?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.