The “Matthew Effect” is very real for many in the home loan market.
In the parables of the Bible, Saint Matthew says: “For to him who has more will be given, and he will have plenty.
But for people who have little, little will be given, and when it comes to home loans, that means little deposit, and not enough income.
When the government tightened responsible lending rules, banks claimed they needed to turn down more loan applications, but mortgage adviser Campbell Hastie said the stricter rules did not stop potential borrowers from get loans.
Home loans more difficult to obtain
“The biggest things that are stumping customers, and the ones that are also worth it, are the Reserve Bank’s test rates and LVR restrictions,” Hastie says.
Test rates are the notional interest rates that banks use to calculate whether people can afford loans.
After announcing an after-tax profit of $1.42 billion, ASB chief executive Vittoria Shortt said the bank’s test rate had risen from 6.45% to 7.85% between October and July, as the Reserve Bank raised the official exchange rate by 225 basis points.
Buy now, pay later (BNPL) loans have become a habit, according to a government survey. Many people are caught in a consumption cycle fueled by BNPL. He has another dark side. Some people buy basic necessities like meat and medicine on BNPL.
This made it difficult for people with small deposits or whose income had not grown as quickly as test rates.
People eligible for smaller loans
Hastie says he was contacted recently by a couple with a new baby, who needed a bigger place, and thought they could afford it because the mother was returning to work.
They had a $600,000 home loan and assumed they would be able to borrow a lot more, Hastie says.
But they got their current loan when the bank test rate was only 5%.
When the banks returned after their affordability checks, which included factoring in childcare costs, the couple were offered just $50,000 more in borrowing.
“Those two things cost him $90,000,” Hastie says.
“There are a lot of people who would like to move, but they can’t because the testing rate has increased, and they can’t borrow more than they already have.”
People who have a lot of equity, who bought many years ago, still get the loans they want, Hastie says.
The same Matthew effect is felt among new buyers. Those with higher incomes and larger deposits fare better.
“The pot of money for low deposit buyers at banks is lower than it was,” Hastie says.
But he urges people to talk to a broker anyway
One more week to get a mortgage
Clark’s rules were intended to prevent lower-tier lenders from making irresponsible loans to vulnerable borrowers.
But even though Shortt said the rules continued to hamper lending, Hastie says they have now settled in and banks and brokers have learned to live with them.
At the start of the new rules, it took several weeks for banks to process loan applications.
Now the time between when a potential borrower walked into their office and the bank making an offer had fallen to two weeks.
Before the rules were introduced in December, it had taken about a week, he says.
Under Clark’s rules, the process of verifying loan accessibility has become more prescriptive, which means a closer look at the details of people’s incomes and expenses.
There were stories about how much people were spending on things like fast food preventing them from getting home loans.
But Hastie says banks are now willing to accept reasonable written commitments that people would spend less on certain things.
“If your KFC habit is going to be a problem, we’ll tell the bank, ‘We’ve had a conversation with the customer, and they’re going to change that behavior,'” he says.
“We do not fall into oblivion. It’s unrealistic. Everyone is going to have some pocket money,” he says.
Personal loans, car loans
According to credit bureau Centrix, demand for credit is starting to return as extreme consumer pessimism begins to fade, with more and more people willing to try to get a loan.
But Lyn McMorran, executive director of the Financial Services Federation of second-tier lenders, says it’s still pretty tough there.
“People are definitely more cautious about taking credit right now with the cost of living,” she says.
And its members, which include lenders like Avanti and Instant Finance, are turning down more loans because of Clark’s rules.
She estimates that around one in 10 people who would have gotten a loan before the rule change no longer get it.
Financial mentors successfully lobbied the government to tighten the rules by producing evidence that lenders failed to carry out proper checks on the affordability of loans, leading to financial hardship for the borrowers.
The loan process was now very intrusive, McMorran says.
It is the marginal borrowers who are least likely to qualify for loans, but if they cannot get a loan from one of its members, McMorran fears they will move on to less scrupulous lenders and law-abiding.
3 minutes, 30 seconds to get a $1,500 loan
One type of loan that has yet to become more difficult to obtain is a buy-now, pay-later revolving credit account, although this may change.
Clark is expected to announce within weeks how it will regulate BNPL, but with more than a million people already having an account, the change could be disruptive.
Financial mentors told the Minister that they see people in financial difficulty with multiple BNPL accounts, with debts they have no income to repay.
But applying for a BNPL account only takes a few minutes, and since no interest is charged on BNPL loans, they are not covered by responsible lending laws.
It can take as little as three and a half minutes to get a BNPL loan online, without a financial capability check.