A financial coach has identified what she believes are problems with the Government's new lending rules: "clunky" methods to assess someone's financial health and "severe" consequences for breaking the law.
In a bid to protect people from predatory and irresponsible lending, the Government in December amended the Credit Contract and Consumer Finance Act (CCCFA) to require stricter scrutiny of borrowers' financial health.
But since the CCCFA changes, bank customers have complained about having home loans declined based on spending too much on takeaways and Christmas shopping.
Last month ASB Bank said about 7 percent of its customers missed out on loans due to the changes, while Reserve Bank data showed total lending commitments at $7.9 billion in December down to $4.6 billion in January.
Commerce Minister David Clark earlier this month announced the legislation had been tweaked to "curb any unintended consequences being caused" by clarifying that when borrowers provide a breakdown of their future living expenses, there is no need to also inquire into their current living expenses from recent bank transactions.
But financial coach Shula Newland, founder of Full Balance Financial Coaching, says it doesn't address the underlying issue that the methods lenders use to assess affordability are "pretty clunky" while the consequences for breaking the law are "severe".
"Accurate and quick technology that can properly assess affordability just doesn't exist at the moment, which means lenders need to manually check everything, and that's a reason why we're getting some marginal decisions," Newland says.
In addition, directors and senior managers of lending businesses may be personally liable with penalties of up to $200,000 for breaching the rules, as well as potential court ordered damages or compensation.
Newland says it's a difficult issue to resolve.
"The rules were good, but it is just very hard to determine how people spend money, or to have conversations around how they could get affordability.
"The new amendment rules will now open up the door to 'made up' budgets again which look to the future without first understanding the past - which is the perennial problem confronting lenders."
Newland's comments come as annual house price growth shows signs of easing. House prices are now sitting at 14 percent higher than a year ago, down from 30 percent in mid-2021.
While an easing of house price growth will be encouraging for first-home buyers, houses are still far from affordable. The latest Real Estate Institute data shows it now takes 11.7 years for Kiwis to save a house deposit, up from 9.3 a year ago.
The Reserve Bank also tightened restrictions on lending in November, with a 2013 measure known as loan-to-value ratio (LVR). LVRs were removed in response to the economic impact of COVID-19 in 2020 and later reinstated in March last year.
Banks are now only able to lend 10 percent of their new lending to owner-occupiers wanting to borrow more than 80 percent of a house's value.
According to the Real Estate Institute, currently 48 percent of household income is required to service an 80 percent LVR mortgage, based on the average property value, with the mortgage over a 25-year term. It's up from 33 percent in 2020.
The Reserve Bank has also been creeping up interest rates to cool down the housing market - a fire it started after dropping interest rates to record lows to keep money flowing during the COVID-19 economic downturn.
ASB Bank chief economist Nick Tuffley anticipates "a steady sequence" of interest rate hikes by the Reserve Bank as it tries to ease inflation, which will add additional financial pressure to homeowners with mortgages.
The Official Cash Rate (OCR) hit 1 percent last month, up from the historically low 0.25 percent setting imposed at the start of COVID-19 to stimulate the economy.
The 25-basis-point OCR hike would cost the average mortgage holder an extra $825 a year, or $16 a week, according to Reserve Bank Governor Adrian Orr.
ANZ and Westpac's economists pick the OCR to hit 3 percent around the middle of next year, while ASB is picking 2.75 percent in early 2023.
The Reserve Bank's Funding for Lending Programme, which made $28 billion available to banks to encourage lower interest rates on loans, is in place until December.
ASB said last week 4300 new-builds were underway thanks to its Back My Build home loan, backed by discounted funds available under the Funding for Lending Programme. To date, ASB has drawn down $2.9 billion.
It reflects the record number of new houses consented in New Zealand - 48,522 new-builds were given consent in November, representing a 26 percent annual increase.
