I hope you are taking good care of yourself and your family during this challenging time because of the Covid outbreak. 

Recently, most of us have been aware that the current loan applications were so difficult to get over the line. Many of our recent clients could not get approved for the amount of loan they usually will get from the bank. Many factors cause this issue. The most common factor we have been exposing from all kinds of media is CCCFA. The CCCFA harm almost every applicant, including first home buyers, investors, and property developers. Even the low-risk applications will get declined or approved much less for nonsense reasons. However, CCCFA is not the only factor that affects the applicant's borrowing capacity. 

Therefore, in today's content, I have summarized the total nine factors that will harm almost every borrower's lending capacity. The following analysis table categorizes these nine changes lenders made in recent months, and the drivers cause these changes, the impact group affected by these changes and the impact level. Now let's have a look.

Changes	Driver	Impact Group	Impact level
1. Increased Rental Shading – 70% -75% depending on build year or purchase time	CCCFA Interest deductibility	Property investor	Moderate
2. Existing loans on interest only have higher calculated repayment	CCCFA	Property investor	Severe
3. Test Interest Rates	Actual interest rates increase	Every borrower	Severe
4. More expenses are added to living expense for investment property rates and insurance	CCCFA	Property investor	Severe
5. Scrutinization of living expenses and adding up every dollar you spend	CCCFA	Every borrower	Severe
6. Introduction of DTI	DTI	Every borrower	Moderate
7. Net job income reduced for people earning over $180k	Tax policy	Borrower with high income	Mild
8. Adapted business incomes are reduced	COVID	Self-employed borrower	Depends on industries
9. Borrower’s ages are more sensitive	CCCFA	Borrower over 45	Moderate

1. The increase of rental shading (02:00)

When bank evaluate an investment property income, they will always apply a discount on the gross rental income. The discount amount normally take account into the expenses associated with owning the property such as rates insurance, vacancies, accounting fee and maintenance. Now, the discount amount applies even more on an investment property because of CCCFA and interest deductibility rule. Anyone who is not familiar with CCCFA feel free to review our previous blog content “CCCFA will make it harder for people to get loan approval?”. In summary, CCCFA is meant to protect vulnerable consumers from getting a higher interest and finance costs by those loan sharks, however, the CCCFA amendments overregulated in many ways. The increase of rental shading will have an impact on property investors only, therefore, the impact level from my concern is moderate. 

2. The calculated repayments of the existing loans increase (03:48)

If clients have an interest only existing investment property loan before CCCFA changes, some banks will only add a small margin on the actual repayment amount in the past. However, that is not the case anymore, the calculated repayment amount has increased because almost all lenders now treated them on a principal and interest basis, which means investors will have a less disposal income to cover new lending. The calculated repayments of the existing loans increase have a severe impact on property investors especially with big loans with interest only payment. 

3. A higher test rate for every borrower (04:39)

To minimize the client’s repayment risks, banks use test rates rather than actual home loan rates to evaluate a client’s repayment capability. Since last August, the actual interest rate has increased many times, as we all know. As a result, the test rates which are used for sensitivity testing have also increased . Every borrower will affect by a higher test rate; therefore, the impact is severe, and the magnitude of this increase is significant.

4. Rental property’s rates and insurance are added to living expense (05:35)

Before CCCFA, banks rental income discount have taken into account property rates and insurance.. However, that is no longer the case; the bank will add the property rate and insurance as additional living expenses on top of rental income shading.. Therefore, in lenders’ eyes, the borrowers will have less disposable income for new lending repayments. Adding up additional expense with less net rental incomes will cause a significant impact on property investors, especially those who have multiple rental properties.

5. Scrutinization of living expenses (06:29)

We’ve seen significant differences between the bank minimum living expenses and people’s actual living expenses, especially in the past three months with extremely high inflation in NZ and typical high spending months in December and January due to the holiday season. Under the updated CCCFA, banks need to investigate people’s bank transactions and use the actual living expenses (some banks even manually add up all these expenses). The updated legislation failed to take into account the fact that once people have purchased a house, the first thing they pay is their mortgage and most people will live according to their new budget. 

Before CCCFA changes, banks use common sense approach and credit checks to drive their decision marking. The latest changes had the one size fits all approach that affected almost every applicant.

6. DTI Introduction (07:56)

DTI stand for debt-to-income ratio, which has only been used by a few banks such as BNZ, ASB and Bank of China. DTI introduction will have an impact on everyone with above banks, however, there are still plenty lenders do not use DTI.. Therefore, the impact level is moderate. 

7. Tax changes on people earning over $180k (08:35)

Under new Tax policy changes last year, people who earn over $180k they will expect to pay more tax. As a result, if there is no pay rise, the net income for those people will be less than before which will affect the borrowing capacity. This change will only affect high income borrowers; therefore, the impact level is mild. 

8. Business income (09:11)

The majority business in New Zealand has been affected by Covid in the past two years. The impact can be significant for certain industries such as tourism and hospitality. It’s not uncommon to see banks discount business profit when evaluating self-employed borrower’s borrow capacity, therefore, the borrowing capacity for these business owners would be less due to unpredictable business income reduction.  

9. Borrower’s ages are more sensitive (10:07)

Bank would not discriminate applicants against their age, however, if borrowers are applying for a 30-year long term loan, bank will consider borrowers’ work capacity in relation to their age. It will be quite challenging to get a 30-year long term loan approved for people who are over 45. The age impact is mainly limited to people who are looking to purchase their home, and not so much impact on  property investors because their can sell investment properties as exit strategy . Therefore, the impact is moderate and only affect people who are over 45 applying for a long-term home loan for purchasing their home. 

The changes in the above nine aspects have effect on almost every borrower simultaneously in the last three months. The first home buyers borrow capacity will be mainly affected by increasing test rates and living expenses scrutinization. The property investors will be affected by almost every aspect.

The borrow capacity has been signicantly reduced, which leads to another problem: it is difficult to reach sellers’ reserved price, which further causes less properties being put on the market . Ultimately, the current housing market is equivalent to a semi-stagnant state.

In addition to first home buyers and property investors, property developers are also facing difficulties. The banks always require pre-sale and fixed price contracts when consider property development loans. As far as the current property development environment is concerned, there are too many uncertainties to pre-sale due to the constant changes in lending policies. Because the pre-sale condition is hard to meet, many developers start seeking property development loans from non-bank lenders, however, most non-bank lenders’ lending capacity has reach to their funding limitation and they have very low appetite for construction loans. As a result, the non-bank lenders are extremely cherry-picking their clients on property development loans.

The government are reviewing the CCCFA, and we hope people can get some relief soon. However, it is not the only factor that affect borrowers’ lending capacity, but it is one of the most significant drivers. In the meantime, our Prosperity advisors would like to help our clients adapt all these changes with tailored solutions that can be act immediately to achieve your property goals. Please keep watching the upcoming videos and blog that will provide more specific solutions in detail to overcome current lending issues. 

Read More:

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

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.