Bolton said recent examples of mortgage borrowers struggling to meet new service demands include a couple splitting up with existing equity (one partner earns less and wants to buy out the other), a small business owner low income who puts money back into their business and a borrower wishing to use their partner’s board as income.
“[Under new credit rules], banks will interpret these situations conservatively because they don’t want to take any risk, ”said Bolton
Keith McLaughlin, managing director of the Centrix credit bureau, said comments showed lenders were aware of their obligations and were “ready to go.”
“It’s going to involve a lot more work, a lot more information – and more difficult decisions to make,” McLaughlin said.
For new mortgage borrowers who want to do their best, Newshub asked John Bolton and Keith McLaughlin for their top five tips.
1. Allow more time
As loan evaluations take longer, new mortgage borrowers who plan to purchase a property within two to three months are advised to register early.
“As things take a lot longer, don’t leave things until the last minute – get there really early and start talking to people so that you can work out a game plan together, ”says Bolton.
2. Tighten your belt (reduce discretionary spending)
To determine income and expenses, lenders typically look at bank statements for the previous three months.
New borrowers, especially first-time home buyers, are encouraged to look at their discretionary spending (eg, take out, memberships, memberships, entertainment) to see where they can cut back.
“More than ever, really tightening the belt before you have to leave is the best proof of affordability,” Bolton said.
Due to the increased emphasis on affordability, McLaughlin suggests borrowers ensure that their accounts have a surplus at end of each month.
“It’s keeping in mind that in three months you will have to justify how you are going to pay this money back… the best way to demonstrate that is to manage your money up front,” he said.
3. Avoid taking on high interest debt
High interest debts, such as car loans and credit cards with outstanding balances not paid by the due date, reduce borrowing capacity.
“Try to avoid consumer credit debt, buy now, pay later [and] auto loans, ”Bolton said.
Centrix suggests borrowers concerned about their credit rating request a free credit report on themselves from one or all of the three major credit bureaus.
“If there is something that you don’t understand or are not satisfied with, you have the right to ask for an explanation or a correction,” McLaughlin said.
4. Reduce or repay the student loan
Those with a student loan are advised to reduce their debt to a manageable level before applying for a mortgage.
Bolton says past experience has shown borrowers can have a better chance with a slightly smaller deposit – and no student loans, as opposed to a larger loan and a larger deposit.
“Remember, you have to pay off your student loan… a large student loan will likely make it harder to buy a home,” says Bolton.
5. Get advice before buying or selling
The CCCFA changes have implications for new and existing borrowers, Bolton says.
For example, a business owner or a senior selling a property to free up money for a specific purpose may be asked to repay an existing loan.
He suggests borrowers seek independent advice, for example from a mortgage broker or financial advisor.
“The risks are considerably higher now… if you buy a property, sell a property, apply for an add-on, or need access to equity… any of those things triggers a full valuation,” Bolton said.
Couples applying together might consider each having a separate primary bank, to increase their options, he said.
The CCCFA changes officially come into effect on December 1.
The changes apply to all new loans, as well as increases to existing credit facilities, such as an add-on mortgage for a home renovation or an increase in the limit on a credit card.
Borrowers wishing more information on the changes can find more information here.