Prior to December 2021, getting a mortgage in New Zealand was about getting past two significant hurdles — the deposit you needed and the income you received.
With changes to the Credit Contract and Consumer Finance Act (CCCFA) from 1 December 2021, the landscape for applying for a mortgage has changed. It’s no longer just about your deposit or income; the two hurdles you will face will be the size of your deposit and your leftover income. Or as it’s referred to in the industry: your money or your lifestyle.
Deposits have primarily been the big lever that the Reserve Bank of NZ has played with previously. Changing the Loan to Value Ratios (LVR) has been the Bank’s preferred method of increasing or decreasing the amount of finance available in the market. It’s a better alternative to raising interest rates, which was the preferred method from the 1980s through to 2008.
The key point is how you’re spending your paycheck. In the past, if you were going out for a drink or two on Friday or indulging in the occasional luxury avocado on toast, the bank would understand that your spending would change once you were a homeowner. This turned out to be quite accurate. Bank statistics show that 99.5% of homeowners prioritize their mortgage payments and spend what they have left. In other words, only 1 in 200 mortgage payers ever went overdue on their mortgage.
However, there has been a push from the government for even more responsible lending. In fact, there is a code now in place called the Responsible Lending Code, and it puts a lot of pressure on the banks and other lending institutions to make sure that the people they lend to can afford the repayments. As a result, the three months of historical spending for any mortgage applicant now must be assumed to be the expenses going forward.
Enter software like PocketSmith, where the very function is to categorize your expenses and see where you are spending your income. In the past, this may have been a nice-to-know; however, with the new regulations, it is a must-have. You need to know where you’re spending your money.
The answer depends on how you’re spending your money. If you tend to spend on takeaways or casual spending, you may need to show two to three months of good habits. For these types of expenses, you need to show that you’ve broken the trend and are no longer spending so much.
However, if your expenses are subscription-based items (like dinner food boxes or streaming TV channels), you can cancel those subscriptions and apply straight away. Just make sure to forward your broker the cancellation confirmation emails to include with your application.
If you are looking to purchase a first home, upgrade your existing home or buy an investment property in the next 12 months, now is the time to check how your spending is going. What can you cut down on? What are you paying for and not actually using? Get your expenses tidy today, and your ability to borrow will skyrocket.
Rupert Gough is founder and CEO of Mortgage Lab, author of “The Successful First Home Buyer” and regular columnist for OneRoof NZ. With over 13 years in the finance industry, Rupert is passionate about educating New Zealanders to achieve all of their property dreams.