What do tightening lending restrictions mean for borrowers?

Tighter lending criteria make getting home finance harder. How can you increase your chances?

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Over the past few years, lending restrictions have been becoming tighter and tighter. Factors like loan-to-value ratios, new regulations and an increased focus on borrower's financial health have all made it more difficult than ever to successfully get a loan.

To find out more, we spoke with Money Empire Manager Kayne Wahlstrom about the tighter lending criteria in New Zealand and what people can do to increase their chances of obtaining finance.

Why has lending criteria tightened?

The answer, Kayne explained, is that banks have come under much more scrutiny.

"All the banks are having to look at their current portfolios and are looking harder into what a potential borrower can afford, by looking at their income, expenses and current lifestyles. In other words, they're finding out a borrowers capacity to service the debt."

Much of this is the result of the Responsible Lending Code that was introduced by the Government in 2015, legislation that was developed in part as a response to the global financial crisis of 2007-08 (GFC) and the heated housing markets New Zealand has experienced in the last half decade.

With banks facing increased scrutiny, borrowers' financial situation is getting the same level of attention.With banks facing increased scrutiny, borrowers' financial situation is getting the same level of attention.

"In times past – especially before the GFC – you could borrow money on a whim. But seeing as the GFC was caused in part by people taking loans they couldn't afford and then defaulting, the new regulations require the banks to scrutinise everything and ask, "can the client actually afford this?". Assessing the robustness of a client's position is now important for the banks too – asking what a borrower can afford if interest rates rose to eight per cent, or their expenses increased or their lifestyle changed, for example.

What does this mean for prospective borrowers?

These tighter lending restrictions aren't going anywhere, Kayne explained.

"Things like loan-to-value ratios and income-to-debt ratio testing; these are part of the new normal now as a part of the responsible lending code. Things will only get tougher in borrowing money moving forward."

So what should someone looking for a loan do if they want to increase their chances of success? Make sure their financial history is as clean as possible.

"Banks like clean cut deals. They will always take client A over client B if client A is financially clean; they have no credit card debt they can't pay off, they have no car finance, personal loans or overdrawn accounts. These show an appetite for unsecured, short-term debt that's a negative in the eyes of a bank."

It's not necessarily about having any more money than before – it's simply a case of being smarter with your finances and making your financial history as clean and appealing to a bank as possible.

For the best financial advice in Auckland, get in touch today to start working with the Money Empire team.

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