Has the tough home lending environment started to improve?

The worst of the credit crunch may be over, but it’s still tough for home loan borrowers, mortgage advisers say.

New responsible lending rulesthe Reserve Bank’s reinstatement of loan-to-value ratios (LVRs), which limit the amount of loans banks can make to borrowers with less than 20% deposit, and the rapidly rising mortgage rates transformed the credit environment late last year.

Access to loans was no longer easy, as banks and other lenders applied far greater scrutiny to home loan applications, especially for those with a small deposit.

Mortgage advisors said lenders were turning down loans they would have previously made, and there were reports of people who are rejected based on things like spending too much on a dog.

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This led the government to do a series of changes in the lending rules of the Consumer Credit Agreements and Financing Act (CCCFA) in recent months, though banks said they didn’t go far enough.

Changes included excluding savings and investments from expenses, removing the requirement of a “reasonable surplus” if a lender applied appropriate buffers and adjustments to income and expenses, and guidance for when it was “obvious” that a loan it was affordable.

Now economist Tony Alexander’s recent surveys of mortgage advisers and real estate agents suggest the worst of the credit crunch may be over, and buyers’ concerns about access to finance may be easing.

A net 25% of advisers reported that banks were more willing to advance funds in the august poll. In contrast, the previous month a net 9% reported that banks were more willing to lend funds, while in June a net 18% reported that they were less willing to lend.

Alexander says the August result is the strongest since November 2020, but that doesn’t mean credit availability is now what it was then.

But with the release of the latest real estate market figures from the Real Estate Institutethe institute’s executive director, Jen Baird, and ASB economists also noted some easing in credit conditions.

So have changes in lending rules made a difference and relaxed the credit environment for buyers?

Financial Advice NZ chief executive Katrina Shanks says there has been a slight relaxation in lenders’ criteria due to rule changes, but lending has not returned to last year’s levels.

This shows that while the changes are positive, they are only making minor adjustments and have not had a big enough impact on banks to change the lot of many borrowers, he says.

“The problem with the CCCFA is affordability, and until there are changes to the affordability requirements and criteria, there won’t be much of a difference.”

Bank directors and senior executives should also not be personally responsible for lending decisions, as they currently are under the rules, he says.

“It means they are very conservative about what they allow their employees to do, and unless there is legislative change around this lever, the credit environment is not going to go back to what it was.”

The credit environment has not relaxed as a result of the rule changes, agrees Mortgage Supply Company director David Windler.

“They have eased some paths a little bit and made the requirements more clear, but that is completely outweighed by ever-increasing banking service testing fees.”

Banks “stress test” applications at an interest rate higher than the loan rate to ensure a borrower can afford larger repayments if rates go up.

Every time a trial rate goes up, borrowing capacity goes down, so a good borrower may get the approval they need for a loan, but it will actually be one approval to borrow less, he says.

“The highest test rate is now 8.15%, but interest rates could still go higher, so test rates could too, and that has a significant and ongoing impact on affordability.”

Windler says it’s unclear when the credit environment will ease further, but the Reserve Bank will have to ease LVR caps at some point.

“That is because they are controlling the availability of credit and the market. Making more lower deposit loans available would help.”

Hastie Mortgages adviser Campbell Hastie says that while it’s not much easier to get loans, the speed of response from banks is quicker.

Often, it just means banks say no much faster than before, but turnaround times for loan approvals have improved significantly, he says.

“Last year it took weeks to get back to you, and now it only takes a few business days. The slower market and lower volume of activity play a role in this.

“Along with that, everyone seems to be getting used to what we have to do under the rules, including the banks that are getting up to speed on the processes involved, and that is helpful.”

Loan market adviser Bruce Patten says there has been some easing in the credit environment, but in the larger scheme of things it is minimal.

This is because there has been credit relief for borrowers with heavy applications and high deposits at the low-risk end of the scale, but not for borrowers considered higher risk.

High risk includes those with lower deposits, and that includes many first-time homebuyers who often stretch their ability to borrow the maximum amount possible, he says.

“So it hasn’t gotten any easier for first-time homebuyers, and it won’t be until the Reserve Bank relaxes LVRs so that more than 10% of loans from banks can be for more than 80% of the loans.

“Traditionally, first-time homebuyers make up 20-25% of the market, but with LVR’s current setup, banks don’t have that kind of low-deposit lending capacity.”

Despite that, there has been a spike in home loan applications over the past two or three weeks, and Patten expects the seasonal momentum to continue as the weather improves and interest rates stabilize.

Squirrel Mortgages founder John Bolton says that people have been very bummed out about anything related to the market for some time, but the mood seems to be picking up a bit.

Prospective home buyers have realized that the world is not ending and it seems that Interest rate hikes may peak around the 5.5% mark, as most of the projected official cash rate increases are already priced in, he says.

“An improved sentiment is good for the market as it encourages activity. That is also transferred to the banks, since it spreads the risk for them and increases their willingness to lend”.

But banks remain tough on their lending, test rates are high, which has reduced borrowing power, LVRs are frustrating, and CCCFA rules remain problematic, he says.

“That doesn’t make any significant difference in credit approvals right now, but it may be that there has been a philosophical shift and that could start to impact the broader environment.”