The real story on the CCCFA and low deposit lending
Welcome back for 2022! It’s a new year, but the housing market continues to be a hot topic of conversation, which I don’t see changing anytime soon.
If you’re in the industry or looking to buy property, it’s been hard to escape the recent media horror stories about people having their pre-approvals cancelled and being unable to secure a loan due to seemingly small purchases like $187 at Kmart or spending too much on their dog.
But is a $5 coffee a few times a week really going to get your mortgage application declined? Read on to find out, plus I provide an update on how loan-to-value-ratio (LVR) restrictions are affecting the market in 2022.
Don’t cancel your gym membership just yet
The intention behind the Credit Contracts and Consumer Finance Act (CCCFA) that came into force on 1 December 2021 was to enable people to make informed choices, understand what they are agreeing to and put extra onus on lenders to ensure loans are affordable, to protect consumers from taking on too much debt. It was particularly targeted at loan sharks and those who take advantage, signing customers up to loans they are unable to repay, rather than mortgage lenders.
However, recent media reports blame the CCCFA for mortgage pre-approvals being cancelled, and the proportion of home loan applications that resulted in home loans falling from 36 per cent to just 30 per cent since it was entered into law.
In our eyes, the real story is that yes, banks are looking more thoroughly at clients’ expenditure, and each lender is taking a different stance on how to interpret the Act. But is your gym membership going to get your mortgage application declined?
The short answer is no. Most of the stories in the media will have underlying issues and other contributing factors specific to the person or couple, that have led to the declined loan.
What we are seeing is banks requiring more documents than ever, right down to insurance quotes and rates invoices. Whilst the CCCFA is causing a few hurdles, we are yet to turn a customer away solely related to the Act. As is usually the case, it’s best to take the media stories with a grain of salt, and get in touch with us to find out your personal situation.
As I discussed in our December blog, the Reserve Bank cut the amount of low deposit home loans banks are allowed to write in November, so that borrowers with less than a 20 per cent deposit make up just 10 per cent of their total new lending. This saw major banks stop lending to those with a 10 per cent deposit.
This has directly affected first home buyers, and we’ve found we’re currently unable to obtain finance on an existing property where the client’s deposit is less than 20 per cent.
How long this will last is a tough one to predict; I hope it may start to open up in April as it marks the start of a new financial year.
It’s important to note that it’s not impossible for first home buyers. Options include:
· Buying/constructing a new build, which is available from 10 per cent for owner occupiers and investors.
· First Home Loan, which is available from five per cent, although the property price cap is unrealistic at $525,000.
· Guarantees; we’re seeing more parents come to the party to guarantee the shortfall in deposit.
If you’d like to know more about any of these, do get in touch with our team to talk further about how they could work for you.