The worst of the credit crunch may have passed, but it is still tough out there for home loan borrowers, mortgage advisers say.
New responsible lending rules, the Reserve Bank’s reinstatement of loan-to-value ratios (LVRs), which limit the amount of lending banks can do to borrowers with a deposit smaller than 20%, and the rapid rise in mortgage rates transformed the lending environment late last year.
Access to lending was no longer easy, with banks and other lenders applying much greater scrutiny to home loan applications – particularly for those with a small deposit.
Mortgage advisers said lenders were declining loans they would previously have made, and there were reports of people being turned down based on things like spending too much on a dog.
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This led the government to make a series of changes to the Credit Contracts and Consumer Finance Act (CCCFA) lending rules over recent months, although banks said they did not go far enough.
Changes included excluding savings and investments from expenses, removing the requirement for a “reasonable surplus” if a lender applied adequate buffers and adjustments to income and outgoings, and guidance for when it was “obvious” a loan was affordable.
Now, economist Tony Alexander’s recent surveys of mortgage advisers and real estate agents suggests the worst of the credit crunch may be over, and buyer concerns about access to finance may be easing.
A net 25% of advisers reported that banks had become more willing to advance funds in the August survey. In contrast, the previous month a net 9% reported banks were more willing to lend funds, while in June a net 18% reported they were less willing to lend.
Alexander says the August result is the strongest since November 2020, but it does not mean that credit availability is now what it was back then.
But, with the release of the latest Real Estate Institute housing market figures, the institute’s chief executive Jen Baird and ASB economists also noted some easing in credit conditions.
So have the changes to the lending rules made a difference, and loosened up the lending environment for buyers?
Financial Advice NZ chief executive Katrina Shanks says there has been a slight softening in lenders’ criteria due to the rule changes, but lending has not returned to near last year’s levels.
This shows that while the changes are positive, they are just tinkering around the edges, and have not made a big enough impact on banks to change the situation for many borrowers, she says.
“The issue with the CCCFA is affordability, and until there are changes to the affordability requirements and criteria there will not be a huge difference.”
Bank directors and senior managers should also not be personally liable for lending decisions, as they currently are under the rules, she says.
“It means they are very conservative about what they allow their employees to do, and unless there is legislative change around this lever, the lending environment will not go back to what it was.”
The lending environment has not loosened up as a result of the rule changes, Mortgage Supply Company director David Windler agrees.
“They have made some pathways a bit easier, and given more clarity to the requirements, but that is completely trumped by ever-increasing bank servicing test rates.”
Banks “stress test” applications at a higher interest rate than the loan rate to ensure a borrower can afford larger repayments if rates go up.
Every time a test rate goes up, it diminishes the capacity to borrow, so a good borrower might get the approval they need for a loan, but it will actually be approval to borrow less, he says.
“The highest test rate is now at 8.15%, but interest rates might still rise further, so test rates might too, and that has a significant, ongoing impact on affordability.”
Windler says it is unclear when the lending environment will be relaxed further, but the Reserve Bank will have to ease the LVR limits at some point.
“That’s because they are keeping a real lid on the availability of credit, and on the market. Making more lower deposit lending available would help.”
Hastie Mortgages adviser Campbell Hastie says while it has not got much easier to secure lending, the speed of the response from banks has got faster.
Often it just means banks say no a lot faster than before, but turnaround times for loan approvals have improved significantly, he says.
“Last year they were taking weeks to get back to you, and now it takes just a few working days. The slower market and lower volume of activity does play a part in this.
“Along with that, everyone seems to be getting used to what we have to do under the rules, including banks who are getting on top of the processes involved, and that is helpful.”
Loan Market adviser Bruce Patten says there has been some easing in the lending environment, but in the broader scheme of things it is minimal.
That is because there has been lending relief for borrowers with strong applications and high deposits who are at the low risk end of the scale, but not for borrowers considered higher risk.
High risk includes those with lower deposits, and that includes many first-home buyers who often stretch their capacity to borrow the maximum amount possible, he says.
“So it has not gotten easier for first-home buyers, and it won’t until the Reserve Bank relaxes the LVRs so that more than 10% of banks’ lending can be for over 80% loans.
“Traditionally, first-home buyers make up about 20% to 25% of the market, but under the current LVR settings, banks don’t have that sort of capacity for low-deposit loans.”
Despite that, over the last two to three weeks there has been an increase in home loan inquiries, and Patten expects that seasonal lift to continue as the weather improves and interest rates stabilise.
Squirrel Mortgages founder John Bolton says people have been very downbeat about anything to do with the market for some time, but the mood seems to be lifting a bit.
Would-be homebuyers have realised the world is not coming to an end, and it looks like interest rates rises may peak around the 5.5% mark as much of the projected official cash rate increases are already priced in, he says.
“Improved sentiment is good for the market as it encourages activity. That transfers to banks too, as it disperses the risk for them and boosts their willingness to lend.”
But banks remain tight with their lending, test rates are high which has reduced borrowing power, the LVRs are frustrating, and the CCCFA rules remain problematic, he says.
“That doesn’t make for any meaningful difference in credit approvals at this point, but it may be that there has been a philosophical change, and that could start to impact on the broader environment.”