Banks tighten reins on lending - but is it too much?

Lenders are tightening their belts as the interest rate environment continues to trend upwards, and first home buyers have been given another hurdle to jump by Kiwibank, which has announced that it will not be accepting any preapprovals for customers with a less than 20% deposit.

In a note sent to mortgage advisers, Kiwibank said that it will not be accepting any preapproval applications over 80% LVR, except those that are exempt from the Reserve Bank’s LVR rules, such as new builds.

The move is the latest in a series of decisions from main banks and alternative lenders to tighten lending, which have included more intensive affordability assessments, higher interest rates and LVR restrictions.

In an opinion piece for Stuff, Squirrel director John Bolton expressed concern that the new obligations may be more intense than necessary, and will limit borrowers from accessing lending for minor reasons. He said the CCCFA changes in particular have been ‘poorly designed’ when it comes to the mortgage sector, and may have ‘serious unintended consequences’ for home buyers.

“Lenders are now forced to trawl through bank statements in detail, looking at every aspect of your life,” Bolton said.

Read more: Rates rising faster than expected: are clients worried?

“They are being asked to assess the way you live, where you shop, and what you buy. Do you spend too much on Friday nights? Should you have purchased those shoes on Afterpay? Will you get pregnant in the next 12 months? It’s all up for interpretation.

“And if lenders don’t do that, or the regulator thinks they got it wrong, they could end up with a fine of up to $200,000 falling on the individual responsible.”

Despite this, the alternative space has been more positive about the changes, and has assured advisers that lenders will still be able to offer good deals and flexibility to their clients.

Resimac’s head of credit Vincent Van Der Kraaij said that more complex deals will not necessarily become harder for non-banks to do, and the more ‘straightforward’ deals may actually become easier to process.

He said that while the various changes and rising interest rates have caused some anxiety, he still expects borrowers to have a wide range of options, and those who have accessed lending in the past several years to be “relatively comfortable.”

“Complex deals, by their nature, need more information. I would say it’s the other way around - if it’s a simple application where you’ve got certainty of income, everything is regular and you don’t have anything weird and wild, the non-banks will be able to pick those up and make the ride smoother,” Van Der Kraaj said.

“I don’t think complex deals by their nature will be more straightforward than they have been in the past, or necessarily any more difficult. If there’s a certainty around them, then they’ll actually be more clear and simple.”

“When it comes to rates though, it’s all part of the cycle,” he explained.

Read more: How will CCCFA changes affect advisers?

“With any type of change there’s uncertainty, and you’re going to see some more panicked responses before people take a breath and figure that the world isn’t coming to an end.”

Van Der Kraaj said that, despite this, people are becoming ‘less bullish’ than they have been in the past, and that’s due to the amount of change happening within the industry. However, he noted that these changes are also not unexpected - they’ve been anticipated and planned for, and lenders have been ensuring that borrowers are in a good place with their future finances.

“I’ve never known a time where there’s been so much change,” Van Der Kraaj said.

“We’ve got the regulatory changes on one side, then we’ve got the taxation changes, people in lockdown having more uncertainty around their income, and now we’re expecting interest rates to rise again too.”

“For those who have had their mortgages for five or 10 years, they may never have seen interest rate rises,” he said.

“That naturally is going to be a bit of a shock to them, but as far as how we assess things, we’ve always had buffers and margins, so there isn’t going to be any immediate problem. As far as creating headroom for that, it’s going to have to go a long way before people will be in serious trouble.”

“That said, there is a serious possibility that people will need to tighten their belts,” he concluded.

“But I think most of the people who have gotten their lending over the last few years should be relatively comfortable with the increased due diligence that banks and lenders have already done. Those margins and buffers will ensure that people are well placed for this ride, and it’s not like it’s unexpected - it’s all part of the cycle.”