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Once upon a time, the banks would generally accept your ‘future position’ when requesting new lending - which meant that (within reason) you could secure your loan based on the premise that you would tighten up your spending habits come settlement time.
Unfortunately, these golden days are behind us. An 2021 amendment to the Credit Contracts and Consumer Finance Act 2020 (CCCFA) regulations require that all bank lenders check their potential borrower’s serviceability profiles. This profiling now includes a line-by-line assessment of your recent bank statements, and a tally-up and average of each expense category, over the last three months.
Essentially this means that your past spending habits are very much in the spotlight and will be poured over with a fine-toothcomb.
These changes to the Credit Contracts and Consumer Finance Act 2020 means that lenders will apply more scrutiny to applications and conduct extra tests to determine whether loans are affordable for borrowers.
As you can imagine, this is making applications slower to process, and means banks and financial advisers need to ask more questions to ensure they have best protected your future serviceability.
The hard truth: banks and lenders are assessing your expenses and surplus cashflow based on your activity to date, leading up to requesting finance approval. There is no more ‘when we buy a house, we will cut back on all the nice to have’s’.
In the lead up to summer fun and Christmas, this seems like a cruel reality to note that every purchase you make will be considered an outgoing expense for the upcoming financial quarter.
The banks also are asking more questions into your future position/s, and want to know of any likely changes to your financial circumstances (e.g. planning a pregnancy).
If you are wanting to apply for any new lending, e.g., for a new home, a new investment property, or even for a top-up loan in the next few months, then we suggest you refer to the following Five T’s, as a guide to set yourself up for a successful credit application:
1. Track Record
2. Tally
3. Trim
4. Transparency
5. Team
The money you spend today, next week, and next month are all going to show up on your financial track record, for any loan application you make within three months of that expenditure. With that in mind, before making any upcoming purchases, especially consumer goods, we urge you to think about how it’s going to impact your financial profile. If you can reduce spending in the lead up to your application submission – it is really going to help present a more favourable application.
There is no right or wrong way to tally your expenses. The key thing is to have an idea of your budget, what you are spending and on what, and how this impacts your financial goals.
Software applications like Excel or Google Sheets enable you to record your spending at a basic level. Simply download a .CSV file from your online banking provider, import it into either of these software programs, and do a basic tally of your spending habits to create your current snapshot.
If you want to go that next step, we’ve observed that a zero-dollar budgeting apps, such as Pocketsmith, are proving popular with our clients. Pocketsmith is one of many popular apps to track your spending, allowing you to sync the app directly with your online banking and set up codes for your payments. The app (once coded) then tracks your progress alongside personal budgeting goals, encouraging accountability. This can motivate you to stick to your saving goals, when passing pretty stores and browsing Boxing Day sales.
If you are not keen on using an app, Sorted.org is a popular New Zealand website, providing great tools towards financial planning and budgeting online.
Like many things in life, it may take trying out a couple of different options before you find the budgeting tool that appeals to your money personality.
A $5 coffee here and $8 parking there, it all adds up. Even if you’re not actively setting yourself a budget and tallying your expenses, browse the last three months of your bank statements to see what discretionary expenses you could do without. If you’re like most customers, it’s easy to clock up hundreds of dollars in outgoings across entertainment streaming sites (such as Netflix), music subscriptions (such as Spotify),in-app purchases and your daily route past the café. If there’s room to trim your spending, we highly recommend you do it before applying for new lending.
The other thing to keep in mind when trimming your outgoings, is to reduce your secondary debt profile.
A lot of clients don’t realise that Hire Purchases and ‘interest-free credit’ facilities, such as GEM Visas, Q-cards, Harmony Finance, Afterpay and even Student Loans, are all factored in as debts in your new lending applications.
Banks want to see that standard credit cards are repaid each month in full, and they will factor in any secondary debt as part of your overall total debt-to-income ratios (known as TDTI’s). When applying for new lending, be sure to disclose any secondary debt and, where relevant, provide a narrative around repayments or areas of debt consolidation you may require as part of your new lending application. You also want to avoid any un-arranged overdraft fees or late payments on cards, as these are unfavourable with the bank.
In response to the above – if you do have any secondary debt – make sure to include this in your lending application. The banks will see any of these secondary debts when they run a credit check, so it is much better for all involved to disclose and include these from the beginning. Leaving them off causes delays, as your application needs to be reworked to include these debts. Banks will want to see evidence of the current balance and the monthly repayments, as well as six months of statements that show your name and evidence of the financial character on these credit facilities.
If willpower is your strength, you may be able to go it alone on the above financial tweaks, however most people find it useful to have an accountability partner. That may be via an app like Pocketsmith, or it may be via having a great partner you are actively house hunting and setting savings goals with.
Working with a financial adviser is great, as we are always working towards presenting clients to banks in the best light possible. If you want to check in and get us to review your position and areas you can improve your financial character, prior to applying for new lending in2022, then get in touch. We get real joy in helping to tidy and trim outgoings and get you ready to put your best foot forward to achieve your future financial goals.
When you feel like you’ve nailed the Five T’s and are ready to submit a new lending application, remember the three P’s:
When applying for lending, come armed with recent and detailed information regarding your financial situation. We need to see evidence of:
· Your recent income (last three payslips if PAYE; Or, two years’ financial statements and Year-to-Dates if self-employed), and;
· Bank statements balances, and repayment amounts for all debts over the last 180 days, and;
· Everyday bank statements for the last 90 days, and;
· Savings statements for the last 90 days, and;
· Credit card statements for the last 6 months.
The clearer you can be about what your expenses will look like moving forward, the more efficient and accurate the credit application process with your bank will be.
Credit applications are taking more time than they have historically. Please rest assured that these changes in policy are to help ensure that all consumers obtain suitable and affordable credit from lenders.
It is essential the bank understands why you are requesting borrowing, and the amount you require to borrow. Be prepared to explain the reasons you require new funding.
To better understand the new lending application process, please contact one of our financial advisers. They can talk you through the requirements to gain approval under the new credit regulations, and ensure any new lending serves your long-term financial goals.
About Kirsty:
Hi, I’m Kirsty. I’m a Client Services Manager in Brendon Ojala’s Velocity pod - which means I help welcome new clients, get applications to banks, make sure properties are accepted, ensure deals are approved, celebrate tenders won, ensure clients are confident at auctions, and best of all check in to make sure keys are smoothly handed over at settlement. I love my job because it’s fast paced, I’m working with fascinating people in an industry I’m passionate about, and no two days are the same. I love that I get to make sure people have shelter, and homes that they love to live in. It’s incredibly rewarding helping first home buyers secure their first property! I also have an interest in residential architecture, and love supporting clients as they build their family dream home. When I’m not at my desk you’ll find me enjoying time in nature, building an architectural house, playing games with my kids, or at a sports event. I like to dance when I’m cooking, and my home increasingly looks like an indoor jungle.
DISCLAIMER:
Before you make any decisions, discuss your situation with an adviser from Velocity Financial, and seek advice from professionals, such as a lawyer and accountant, to find the best solution for your unique situation.