Five tips for new mortgage borrowers as incoming credit law changes cause lenders to clamp down

From December 1, changes under the Credit Contracts and Consumer Finance Act put greater onus on lenders to check borrower information before approving loans.
From December 1, changes under the Credit Contracts and Consumer Finance Act put greater onus on lenders to check borrower information before approving loans. Photo credit: Getty Images.

First-home buyers, older borrowers and business owners are among those who may find it harder to get a mortgage, as incoming credit law changes put greater onus on lenders to act responsibly, mortgage and lending experts say.

From Wednesday, changes to the Credit Contracts and Consumer Finance Act (CCCFA) require all lenders to spend more time gathering and checking information from potential borrowers before they can approve loans.

John Bolton, CEO of mortgage broker company Squirrel, said while the changes are designed to protect vulnerable borrowers, as banks have to make judgement calls, there's less flexibility to adjust the rules to suit individual circumstances.  

Bolton said recent examples of mortgage borrowers finding it difficult to meet new servicing requirements include a separating couple with existing equity (one partner earns less and wants to buy the other out), a small business owner on a lower income who is putting money back into their business, and a borrower wanting to use their partner's board as income.

"[Under new credit rules], banks are going to interpret these situations conservatively because they don't want to take the risk," Bolton said.

Keith McLaughlin, managing director of credit bureau Centrix, said feedback shows lenders are across what their obligations are and are "ready to go". 

"It's going to involve a lot more work, a lot more information - and harder decisions to make", McLaughlin said.

For new mortgage borrowers wanting to put their best foot forward, Newshub asked John Bolton and Keith McLaughlin for their top five tips.

1. Allow more time

As lending assessments are taking longer, new mortgage borrowers planning to buy a property within two-to-three months are advised to get in early.

"As things are taking a lot longer, don't leave things till the last minute - get in really early and start talking to people so you can get a game plan together," Bolton said.

2. Tighten your belt (cut down discretionary spending)

To determine income and expenses, lenders typically look at bank statements over the previous three months.

New borrowers, particularly first-home buyers, are encouraged to look at their discretionary spending (e.g. takeaways, subscriptions, memberships, entertainment) to see where they can cut back.

"More so than ever, really tightening the belt before you need to go is the best evidence for affordability," Bolton said.

Due to increased focus on affordability, McLaughlin suggests borrowers ensure their accounts show a surplus at the end of every month.

"It's bearing in mind that in three months' time, you're going to have to justify how you're going to repay that money...the best way to demonstrate that is to manage your money upfront," he said.

3. Avoid taking on high interest debt 

High interest debt, such as car loans and credit cards where the outstanding balance isn't repaid by the due date, reduce borrowing capacity.

"Try and avoid consumer finance debt, buy now, pay later [and] car loans," Bolton said.

Centrix suggests borrowers concerned about their credit rating could request a free credit report on themselves from one or all of the three main credit bureaus.

"If there's something on there you don't understand or you're not happy with, you're within your rights to ask for an explanation or correction," McLaughlin said.

4. Reduce or repay the student loan 

Those who have a student loan are advised to get debt down to a manageable level before applying for a mortgage.

According to Bolton, borrowers may have a better chance with a slightly smaller deposit - and no student loan, as opposed to a bigger loan and bigger deposit.

"Remember, you've got to pay your student loan back...a big student loan is probably going to make it harder for you to buy a house," Bolton said.

5. Get advice before buying or selling

The CCCFA changes have implications for both new and existing borrowers, Bolton said.

For example, a business owner or elderly person selling a property to free up cash for a specific purpose may be asked to repay an existing loan.

He suggests borrowers get independent advice, such as from a mortgage broker or financial adviser.

"The risks are significantly higher now...if you buy a property, sell a property, go and get a top up or need access to equity...any of these things trigger a full assessment," Bolton said.

Couples applying together could consider each having a separate main bank, to increase their options, he said.

The CCCFA changes officially come into effect from December 1.

The changes apply to all new loans, as well as increases to existing credit facilities, such as a mortgage top-up for a home renovation, or an increase to a credit card limit.

Borrowers wanting more information about the changes can find more information here.