“Would it make a difference if we asked for lower amount instead?”


This is one of the most common questions of 2022. 

Lending criteria, partially thanks to the unbelievably inappropriate but politically highly convenient piece of legislation known as the CCCFA, is something you’ve likely heard about by now.

I was one of the first warning about this almost exactly 1 year ago here, and in the Herald here, then eventually with John Bolton here, and finally with Rupert Gough here.

We’ve been living under a false sense of security knowing our property values have been rising over more than a decade now. The lower interest rates created by the Reserve Bank of New Zealand and Central Banks across the world, has now forced a new mandate of conservatism in the credit space.

Inequality abounds in an environment where only the chosen few qualify for credit. Perhaps that’s another issue, but it’s worth pointing out the wise wisdom of Milton Friedman:

“Inflation is created by Government, and by no one else.”

Let’s get back to your top-up though: So you’re car blew up, the roof leaks, you need a pool before summer – whatever. Why can’t the bank approve a top up as easy as last time?

Let’s take a look at the basics first.

Banks look broadly at three main things when they assess your borrowing power:

1 – Your equity (or savings/cash).

2 – Your income.

3 – Your expenses

If you have the minimum amount of equity in your home of at least 20%, after the top-up is [potentially] approved, then you pass this first test. It should be noted in this environment of falling house prices, many who purchased in the last 2 years with 20% deposit could find they fail this test already.

If you have sufficient income to demonstrate affordability, you pass the next test also.

It’s the third test that’s the issue. With each new interest rate increase, the banks stress-test your affordability at a significantly higher interest rate than you’ll ever be paying (in my view!) – currently this is just over 8%. In addition, banks will take your actual expenses into account now (thanks again to the authors of the CCCFA here!). Don’t be surprised if they ignore what you say your expenses are by the way. ‘Show us what you spend money on, don’t just tell us’. Your estimated budget on a loan application won’t cut it – you need to be exact, and no, they aren’t in fact, easing up in this space yet.

My suspicion is this incredibly poorly designed and applied piece of legislation is being used, by design, to bring down the property market.

Back to you – If you can’t afford it according to the rules they determine, you don’t get any more money -it’s that simple.

Perhaps the last few years of [relatively] easy credit [for some], has led many to rely on the equity in their home as a form of insurance, or even like a piggy bank, when in reality, home equity is not primarily for spending (it’s an index on the lifestyle you require).

Many* people who ‘just’ qualified for their mortgage over the last 4-5 years, wouldn’t qualify for the mortgage they already have.

*Every situation is nuanced, but a $700k mortgage approved in September 2020 would require an income of around $110kpa to gain approval for a single person buying their first home with 20% deposit. That same income today would provide a mortgage approval of only $450k – a 35% reduction in borrowing power.

Tips to get through this tough season of tight credit:

  • Delay renovations if you can (assuming it won’t cause damage to your property).
  • Keep high cash reserves to self-insure common events you can see coming (birthdays, Christmas, holidays, new car etc)
  • Spend money on what you need, not what you want.
  • Stay away from buy now, pay later, credit card debt, and other personal loans (Hey, sometimes there’s no choice, but don’t make top-ups your first option, if you can.)

Fortunately, in many quarters of New Zealand, employment remains strong, and everything moves in cycles.

Eventually, once inflation subsides, I personally believe credit conditions will ease, and interest rates will once again decline. This will get easier.

Until then though, consider yourself warned – borrowing more right now on your mortgage is not a right, it’s a privilege.

Those with the gold, make the rules.