New lending laws a 'nightmare' for people seeking home loans

Have new lending laws designed to protect vulnerable borrowers made it harder for people to buy homes? Mortgage brokers say it has, and that many who do get loans will pay more.
Christel Yardley/Stuff
Have new lending laws designed to protect vulnerable borrowers made it harder for people to buy homes? Mortgage brokers say it has, and that many who do get loans will pay more.

EXPLAINER: “It's a bloody nightmare, and the system is completely buggered.”

John Bolton​, the chief executive of mortgage broking company Squirrel​, isn’t mincing his words about new lending laws.

“I’m actually thinking of setting up a petition to sack the minister of commerce. This is government incompetence at its best,” he says.

On December 1​ banks faced a raft of new laws aimed at protecting vulnerable borrowers.

READ MORE:
* Small deposit? Here's how you can get a home loan
* Bank fair to borrower who couldn't get loan approval in time for auction, ombudsman says
* Household debts climb despite Covid-era credit card 'conservativism'

Under those laws, banks have to go further than ever before in checking they are lending responsibly.

Banks can no longer take on trust information provided to them by borrowers and must verify details of their income and expenditure, which mortgage brokers say has doubled the time it takes to complete applications for home loans.

While that was likely to push up loan application fees, Bolton says the new laws have resulted in banks becoming more conservative and declining more home loan applications.

JOSEPH JOHNSON/STUFF
Harry and Kate Uffindell are former Aucklanders shifting south to Christchurch in part because of the cheaper housing.

Deals that would have gone through a month ago are now being rejected, Bolton says, including deals involving people who cannot be described as vulnerable borrowers.

“I’ve never seen a vulnerable borrower buy a house,” he says.

“I think this is a really, really serious issue. The consequences are massive, and people aren’t really awake to it yet,” he says.

“The collateral damage is going to be big.”

What collateral damage?

Lyn McMorran​ from the Financial Services Federation​, an industry lobbying group for lenders, says borrowers are being subjected to more intrusive application processes, and they feel like lenders don’t trust them.

And with lenders taking a more conservative approach, people who could get loans before might find themselves being declined or told they can have a loan if they change their spending patterns.

McMorran says these conversations could involve sentences such as: “I see you have got Netflix. Would you be willing to give that up to get this loan?” Or: “I see you take $200 a week out of the ATM. What do you do with that money? Could you stop doing that?

“It's a lot more intrusive,” McMorran says.

Squirrel chief executive John Bolton believes the new lending laws have ushered in ultra-conservative lending policies from banks.
SUPPLIED
Squirrel chief executive John Bolton believes the new lending laws have ushered in ultra-conservative lending policies from banks.

Age of lending ‘ultra-conservatism’

The lending law changes follow the Reserve Bank restricting the amount of loans banks can make to people with deposits of 20​ per cent or less, which has seen banks withdraw some pre-approvals.

Rising borrowing rates, high inflation, and fears of house prices declining could all be feeding into more conservative lending policies.

Mortgage adviser Clayton D’Lima​ says banks’ “test rates” had been on the rise. These are the rates banks use when deciding if people could truly afford their loans. They are higher than banks’ actual home loan rates.

ANZ lifted its test rate from 5.8 per cent​ to 6.3​ per cent just four weeks ago, he says.

Mortgage brokers say deals that banks would have accepted a month ago are now being declined.
Stacy Squires/Stuff
Mortgage brokers say deals that banks would have accepted a month ago are now being declined.

Bolton says banks “have gone ultra-conservative in a matter of weeks. Deals that should have been approved are not getting approved.”

Mortgage adviser Campbell Hastie says deals that worked last month do not work now, “and there’ll be more of that”.

He expects things will settle into a new, more divided status quo in which fewer people can get a mortgage.

“It seems to be anathema to a Government who wants to support people into homes,” he says.

Extra cost when the bank says ‘no’

“I reckon about 15 [per cent] to 20​ per cent of the mortgage market is going to have to go to non-bank lenders,” Bolton says.

Non-bank home loans cost more than bank home loans, he says.

Bolton reckons the interest cost across new lending could rise by $500 million a year thanks to the new conservatism.

This phenomenon is also likely to be seen in personal lending, says Keith McLaughlin​, the chief executive of credit reporting bureau Centrix​.

Centrix chief executive Keith McLaughlin says some people who could borrow from banks might find they now have to go to a second-tier lender.
SUPPLIED
Centrix chief executive Keith McLaughlin says some people who could borrow from banks might find they now have to go to a second-tier lender.

“I think some borrowers will move from first-tier lenders to second tier, and second-tier lenders to third tier,” he says.

That will see them having to pay more for their loans. In some cases, it will mean people have to get them from a finance company instead of a bank, he says.

Why the conservatism?

Because the stakes are big for lenders and their directors.

“The penalties are up to $600,000​ for companies, but up to $200,000​ for each of the directors and senior managers,” says McMorran​.

“That's a personal liability they can’t insure or indemnify themselves for. They are significant.”

The other threat is that directors and senior managers face the phased introduction of “fit and proper person” tests to be able to control lending companies.

Being unable to pass those tests could be devastating for their careers.

Are lending levels plunging?

Centrix has not identified a drop-off in lending as a result of the new laws yet, says McLaughlin​.

But the true impact will take some time to emerge, he says, especially as it could be masked by people borrowing for Christmas.

If this is a costly fiasco in the making, Bolton worries it could be hard to unpick as the changes were brought in by law, not regulation.