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Finance Law Changes Hit Home

The unintended impact of new responsible lending rules is set to devastate everyday Kiwis, writes John Bolton.

By: John Bolton

1 January 2022

How could the Government have got it so wrong with the recent consumer finance law changes? Introduced to protect vulnerable borrowers from shop trucks and predatory lenders, the blanket legislative changes have seen lenders forced to dive deeper into the details of borrowers’ lives as part of the decision-making process.

Vulnerable borrowers don’t buy houses, and yet for those of us in the home loan market, the changes still apply. It means any semblance of trust is gone, and the flexibility and discretion we rely on to make fair and accurate lending decisions is no longer possible.

As CEO of Squirrel, one of NZ’s largest mortgage brokers, I’m deeply concerned about the lack of consideration from the Government around what these changes will mean for regular Kiwis. The unintended consequences have the potential to cripple the economy, and leave home owners and first home buyers out in the cold.

Current Home Owners

Older borrowers will be considered more vulnerable simply because of their age – with no consideration of the equity they’ve accumulated in property.

It will become impossible to borrow from the wealth tied up in your house in the event of an emergency.

With most lenders already reluctant to serve them, it will become even harder for those who buy before they sell to access bridging finance – because they won’t be able to service the whole debt. I’d argue that leaving that risk entirely with the homeowner is anything but responsible. New paperwork requirements for existing loans will make it harder to go onto interest-only, or to top-up your mortgage. Selling a property cross-collateralised with another will require a full credit assessment to see if the bank should keep the proceeds from sale to reduce other debts.

First Home Buyers

For those that don’t already own a home, that dream is now further out of reach. The changes reduce first home buyers’ borrowing power, compounding the impact of tightened LVR restrictions, and the pending introduction of debt-toincome restrictions.

There will be more defaults on property settlements for those who have bought off-plan, thanks to rule changes between purchase and settlement.

With the time and effort required to process a home loan having ballooned from five to over 15 working days, new borrowers can also expect to pay higher establishment fees, of between $500 and $1,000.

Families

It will be near impossible to own a home and have kids, with banks now required to anticipate changes in your expenses, making it harder for expectant parents to buy. Parents going through a divorce will also struggle to keep the family home when they split up the assets.

Business

Our 530,000-strong SME market will be starved of access to capital to drive post-Covid recovery, with the changes making it increasingly difficult for business owners to raise capital using their family home (the predominant way small businesses borrow).

Wider Economy

We’re yet to truly grasp the impact of recent changes like the removal of tax deductibility, CCCFA law changes, LVR restrictions, and higher interest and tax rates. It remains to be seen whether having pulled so many levers will result in a crash in house prices, and crippling flow-on effects for the economy. Our construction industry would see a repeat of the boom-bust cycle, brought to its knees by a dramatic decline in house building and prices softening as costs increase.

What’s devastating about these changes is that when it comes to home loans, there was nothing to fix. Serving 30% of the market, ANZ reported a home loan arrears rate of 0.50%, or just one in 200 homeowners, during an undeniably tough year. The bigger issue was low interest rates, and that’s been dealt with.

Some will argue that reducing the amount people can borrow is a good thing. While I don’t disagree, flexibility and adaptability in lending decisions is crucial. Banks were already responsible lenders. With banks increasingly reluctant to lend, borrowers will have to seek more expensive second-tier options instead.

The Government has used a sledgehammer to hit a nail. It may feel like a wrecking ball to those hit with the unintended consequences.

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