Banks rating your spending record higher than your equity?
December 03, 2015 at 4:32 PM
AUCKLAND, New Zealand. – Your spending habits are far more likely to get your mortgage application declined in December 2015 (even if you have enough equity and a high income) because New Zealand’s bank’s have changed their credit policies, almost overnight, to comply with the Responsible Lending Code.
I have been getting calls from frustrated Kiwis whose mortgage applications have been turned down because their lifestyle costs are too high. For example, the may have children in private schools.
All of these clients have the equity and they all have high incomes and disposable cash, but the banks are looking first at lifestyle and the cost of that lifestyle, and if they think it’s a bit extravagant, they’re going to turn you down. They are taking the Responsible Lending Code very seriously.
While we have historically low interest rates, and more first home buyers are beginning to emerge (there is finally better choice on the market for them), the banks have almost overnight become more strict on their credit policies than they have been in years.
Banks are not relying on equity positions now. Instead they focus almost solely on what is available at the end of the month, once all expenses are accounted for. Your uncommitted monthly income is the primary measure. For example, a couple with a high income – and paying top rates for a rental property – may not have anything left over at the end of the month because they have private school fees.
Banks apply what they call living cost standards to each adult and child. On average it is $910 for an adult and $280 for a child. If the family is spending more than what their bank considers a standard amount per person, they will include the higher outgoings and this may determine whether they will approve the mortgage
I’ve even had cases where people have 80 per cent equity. The banks still want to know what’s left over at the end of the month – it seems more of a ‘financial values’ based decision making process than the strictly numbers game of the past.
It’s almost as if the banks are saying ‘yes, this is a low risk loan for us, but is it responsible?’ They’re looking at personal financial discipline over whether or not you can afford the loan.”
It is now more important than ever for Kiwis to demonstrate good bank conduct over a reasonable amount of time. It is in your own interests to:
- Don’t let un-arranged overdrafts occur
- Get rid of high credit card debt – even if you can reasonably service that debt
- Watch how much spend, and what you spend it on
- Avoid maxing out your income
Banks are very nervous about putting customers in a position where they might struggle.
Even the days of using third party security are fading fast. If mum or dad want to sign security for the children, the bank is unlikely to approve the arrangement if mum and dad only own one property, particularly if mum and dad’s income means they are unlikely to be able to service the debt in case of a default.
Technology has given banks a ton of instant data that they can use to evaluate mortgage applicants, and that’s going to make it tougher for anybody who might be ‘living the good life’.
I am currently taking a number of clients through a process of education and advice to help ensure that they can demonstrate a track record of responsible financial management when they finally come to buy – if you’re interested, please get in touch.
It is important because the new regime doesn’t discriminate, and will affect everybody from first home buyers to the self employed and the affluent.
Even if you believe that you are paying more for rent than you would to service the mortgage, it is important to remember that the banks are looking ahead two, three even five years. This means they are calculating your ability to service your mortgage on a principal and interest basis as well as at interest rates considerably higher than they currently are – so that they can be sure you will cope with interest rates rise.