Potential homebuyers are warned that they could face rejection or withdrawal of their pre-approvals for months to come.
The warnings come as the investigation begins today whether banks and lenders are complying with an amendment to the law to protect borrowers as intended.
Home loan pre-approvals are an acknowledgment by the bank of how much optimistic buyers can spend.
But as loan market mortgage advisor Bruce Patten points out, that’s far from a guarantee — especially for those who now have less than 20 percent of deposits.
“There were a couple of banks before Christmas that pulled some of their existing pre-approvals, and we’re hearing stories that some other banks might be pulling their pre-approvals.
“It will depend on how many pre-approved customers are buying at the moment, so if they are close to their cap, they will have to withdraw their pre-approval if the person does not make the purchase,” he said.
Late last year, the Reserve Bank changed the loan to valuation restrictions so that only 10 percent of bank lending could be done to those with low deposits — less than 20 percent.
Patten said things will eventually get better, but it may take some time.
“The Reserve Bank will go back to 15 percent and then to 20 percent of its lending, but that could take another six months before we see another move, or 12 months if the market really continues to run.”
He said the next few months will make it clear when these restrictions will begin to be liberalized.
Kiwibank said it was encouraging customers to save as much as possible to deposit.
Westpac has not withdrawn any pre-mortgage approvals, but any that will expire will be reassessed and may not be renewed.
Both noted exceptions to the rules for those eligible for the government’s First Home and New Building Grant.
But that’s not the only change that has moved the center of the goal to the first home buyer.
Changes to the Credit Contracts and Consumer Finance Act (CCCFA), intended to protect borrowers from loan sharks, have caused banks to be overzealous in financial scrutiny of potential buyers, with reports of people turning down over Christmas shopping bills as well as several takeaways.
All these changes are creating the perfect storm, said Katrina Shanks, CEO of Financial Advice New Zealand.
It is especially difficult for those who are already building a home, she cautioned.
“Partially during new construction now and under new criteria pre-approval will be denied or significantly reduced, so these clients may be under severe pressure in the future,” she said.
There has been an increase in complaints about bank delays and failure to act as promised, said Nicolas Sladen, banking ombudsman.
Complaints about housing loan applications being rejected were also a common topic.
Commerce and Consumer Affairs Secretary David Clark said banks appeared to be managing their lending more conservatively, likely due to global economic conditions.
“It may also be the case that in the first weeks of implementing the new CCCFA requirements, there was a decision to unduly err on the side of caution.
“It must be said, that a number of factors that affected the market occurred at the same time as the CCCFA changes, including increases in OCR, LVR changes and an increase in home prices and local government rates,” he said.
The Board of Financial Regulators has been asked to conduct an investigation into whether lenders are applying the laws as intended.
They will meet today, which leads to engagement with banks.
But in the meantime, economist Tony Alexander said there are ways to improve your chances of getting approved for a loan.
“So my advice to first home buyer now is to adjust your spending behavior now, three months before you actually go to apply for a home loan.”
Clark expected to brief the Board on this in the coming weeks.