Today, the final revisions to the Credit Contracts and Consumer Finance Act (CCCFA) amendments that took effect on 1 December last year officially come into force. Many media outlets have described these adjustments as ‘loosening the reins’ on the credit market and heralding ‘a new spring for borrowers’. But is that really the case?
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After the CCCFA amendments took effect on 1 December, banks became stricter when assessing customers’ loan applications, calculating applicants’ income and spending in greater detail. This made borrowing considerably harder for first-home buyers, older borrowers and business owners.
The adjustments to the CCCFA amendments mainly cover the following:
1
Removing regular ‘savings’ and ‘investments’ as examples of expenses lenders need to investigate when assessing a borrower’s future spending;
2
Clarifying that when borrowers provide a detailed breakdown of future living expenses, benchmarked against reliable statistical data, there is no need to examine their current living expenses through recent bank transactions;
3
Clarifying that when lenders assess spending using recent bank transactions, they may ask borrowers how their spending is likely to change once the contract is entered into;
4
Clarifying that the requirement to obtain ‘sufficiently detailed’ information applies only to information provided directly by borrowers, such as ensuring expense categories on application forms are sufficiently detailed, rather than information in bank transaction records;
5
Providing further guidance on when lenders need to consider a ‘reasonable surplus’ — the monthly amount left for borrowers to live on after their estimated expenses are deducted from their income — and how lenders should set surplus requirements;
6
Providing further guidance and examples of when a loan is ‘obviously’ affordable, meaning a full income and expenditure assessment is unnecessary.
These changes do suggest the credit market is beginning to ease, but the adjustments to the CCCFA amendments cannot reverse the broader trend of tightening credit. Most of the previous requirements remain, meaning customers still need to provide detailed information about their spending —
- How exactly does spending affect how much you can borrow?
- What types of spending do banks focus on when approving loans?
- Is spending nothing, or very little, the right approach?
- How can first-home buyers sensibly manage spending under the final revisions?
With these questions in mind, YIJU New Zealand interviewed four senior mortgage managers with extensive experience in New Zealand lending. They shared their views with YIJU readers to help inform future borrowing and home-buying decisions:
YIJU: How does spending affect how much someone can borrow?
Elva Feng：Banks focus on two basic areas when assessing an applicant’s ability to repay a loan: their overall income and their monthly personal or household expenses. This is essentially an assessment of affordability — whether the applicant can afford a new loan after normal living costs and other financial expenses are deducted from their income.
The CCCFA amendments that took effect on 1 December require lenders to calculate spending using applicants’ actual expenses rather than the standard living expenses used previously. Many applicants’ actual spending is much higher than the standard allowance, substantially reducing the amount they can borrow. Spending plays a particularly important role for salaried workers whose income is relatively fixed. For example, gym spending of NZ$140–160 a month could affect borrowing capacity by around NZ$20,000–30,000.
YIJU: What types of spending do banks focus on when approving loans?
Frank Fu：Banks usually divide customers’ expenses into three broad categories:
First, fixed financial commitments, such as rent, property management fees, private school fees, mortgage payments and home insurance; second, living expenses, such as power and water bills, food, public transport, clothing and travel; and third, regular recurring expenses, such as internet, pay TV, personal commercial insurance, dining out, gym memberships and buy now, pay later services.
Any spending in these categories will affect how much you can borrow to some extent.
Two points in the final CCCFA revisions are worth highlighting:
First, regular ‘savings’ and ‘investments’ have been removed as examples of expenses lenders need to investigate when assessing borrowers’ future spending. This means money some applicants regularly put into savings, shares or managed funds for investment purposes will no longer count towards everyday expenses.
Second, banks will accept applicants’ estimates of their spending over the next 12 months. For example, someone may dine out frequently before taking out a home loan, which naturally costs more, but plan to cook at home more often and spend less after buying. As long as the estimate is reasonable, banks will accept customers’ planned changes to their spending habits.
YIJU: What spending do banks dislike, or what spending could affect loan approval?
Charles Wu：For banks, it is not really a matter of likes or dislikes. However, if an applicant has substantial credit-funded spending — for example, multiple credit cards, personal loans or buy now, pay later commitments such as Afterpay — or gambles frequently, the bank will consider whether they will change their spending habits after taking on a mortgage. If applicants already spend their entire income each month, will they have any disposable funds left when their mortgage payment falls due? Banks do, after all, expect their loans to be repaid, and New Zealand’s regulations require lenders not to push borrowers into greater financial hardship in recovering a loan.
Seen another way, banks care about whether applicants can afford their debts, including both existing and new debt, and whether they have good account habits, such as regular saving, and a sound repayment record, such as paying credit cards on time.
For loan applicants, certain spending shown on bank statements can indeed affect borrowing capacity and increase the risk associated with the application:
- Spending that affects borrowing capacity includes frequent, expensive takeaways or meals out, high entertainment spending, high-interest personal loans, and excessive spending banks classify as ‘entertainment’, such as topping up gaming accounts;
- Spending that increases the risk of an application being declined includes casino spending, deposits into online casino accounts and excessive Lotto purchases.
YIJU: Is spending nothing, or very little, the right approach?
Tim Liu：I have seen advice online suggesting people ‘stop spending’, or spend very little, to help their loan application. I think that is wrong and irresponsible. Banks do not expect you to live on bread every day just because you have a mortgage, so there is no need to go to extremes.
Banks have internal benchmarks for everyday New Zealand household spending, derived from large datasets. If your expenses fall below the benchmark, the bank will still use the benchmark in its calculations. That is why the ideas of ‘zero spending’ or ‘minimal spending’ are misguided.
Also, if applicants cannot provide normal spending records — for example, basic household costs such as food, power, water, internet, council rates and home insurance do not appear on their bank statements, or there are too few transactions — a responsible bank will ask for supporting records, perhaps statements from another account, or an explanation. This can actually complicate the application.
We therefore believe normal everyday spending is necessary. Where possible, however, try to reduce costs: cut back on expensive meals out and fuel, save electricity and limit impulse purchases. If you have an upcoming trip planned, you could also consider postponing it until after buying your home.
YIJU: How can first-home buyers sensibly manage spending under the CCCFA’s latest requirements?
Elva & Frank ：Before applying for a loan under the latest CCCFA requirements, first-home buyers should speak to their mortgage adviser early and learn more about the relevant information. If any of the details above remain unclear, the simplest approach is to ask your adviser to check them for you.
We also suggest reviewing your bank transactions from the past three months against the requirements before applying, to understand your spending habits. Sometimes your spending record can be quite a surprise! If you decide to apply for a loan, plan your spending sensibly and reduce unnecessary expenses while maintaining your quality of life. If you have shopping accounts or cards such as credit cards, a Farmers Gift Card, GEM or Afterpay accounts, it is best to pay them off and close them before applying. If your spending is straightforward, regular and restrained, your chances of being approved for your desired loan amount will increase considerably.
Although the lending environment has tightened, I still suggest people avoid worrying too much. Most first-home buyers have no fixed financial commitments; their spending is mainly living expenses and regular recurring costs such as internet and car insurance. Banks’ calculations for these are generally fairly reasonable. Provided there are no large, frequent expenses, the impact should be limited.
I would also remind first-home buyers considering a purchase to manage spending for reasons beyond satisfying the bank’s assessment. With interest rates rising and interest costs substantial, can you truly afford the loan? Borrowers also need to develop good saving habits, building a deposit for a future home and making loan repayments more manageable.