This lending rule change could be a nasty surprise.

Everybody focuses on interest rates, but it’s the ongoing changes to lending rules that could really trip you up.

For instance, the Labour government decided it wanted to reduce the risk of borrowers entering retirement with mortgage debt…so it introduced a rule to stop the banks lending to customers who would need to make repayments after they turn 65.

All well and good. Except this makes it a lot tougher to get onto the property ladder if you’re a late starter.

You may also find yourself unable to change your current mortgage – for instance, by going onto interest-only.

Every week, we talk to people who weren’t aware of this, and how it could affect them.

So here’s a heads-up:

The mortgage game has changed.

If you haven’t recently tweaked your mortgage or taken out a new loan, you may be unaware of how much things have changed.

Now you have to jump through a lot more hoops than before.

Don’t blame the banks. They didn’t create the rules. They are required to follow the Responsible Lending Code and other rules imposed by financial regulators.

These days, the onus is on both the banks and us financial advisers to do a lot of investigations into the borrower’s financial affairs before a loan is approved. We’ve covered this before in detail, but this time we’d like to highlight another issue.

Here it is in a nutshell:

The government wanted to make sure New Zealanders weren’t struggling with debt in retirement – so they have required lenders to apply some pretty strict tests to new loans.

This has had two unintended consequences.

1. If you don't have a mortgage by your mid 40s, you may struggle to get one.

It’s not unusual to find yourself getting onto the property ladder in mid-life. It may be the first time you’ve had the income to justify home ownership.

Or maybe you’ve gone through some life events, such as a relationship break-up, and you need to start again.

But you need to be aware that your mortgage application, income and spending will be closely scrutinised by the bank. If the numbers show you won’t be able to clear the mortgage by age 65, then you may not be able to borrow as much as you need or hoped for.

(There are some exceptions, for instance with rental properties, but as a general rule, the banks are looking at the numbers to see if you’ll be mortgage-free by retirement.)

So if you’re approaching mid-life, this is a heads-up. Get in touch as soon as possible and we’ll work with you to see what you can afford.

Maybe it won’t be your dream home in your dream suburb – but at least it will be yours, and perhaps a stepping stone to that dream home.

2. If you want to change an existing mortgage, you might not be able to.

We know many people who have structured their loans so they’re paying interest-only. Their plan might be to pay off the principal in a big chunk sometime in the future. But for now, they’re simply servicing the loan.

However, as we are all too aware, interest rates can go up a lot. That means a lot of people suddenly have less cash in their pockets. They might want to free up some cashflow by pushing out the loan term.

Or maybe they’ve been paying off the principal every month, but now they’d like to switch to interest-only, and bring down their monthly outgoings.

Under the current regulations, both of these changes would trigger a new loan application.

Yes, that’s right. You can’t just modify the existing loan – the rules require the banks to complete a full new loan application. So you would need to start at square one by showing your pay slips, bank statements, and all your household spending.

The bank needs to analyse the application, and bear in mind they’re looking for the new loan to be repaid before 65. If that doesn’t look possible, we’d need to have some very solid reasons for the bank to ignore this.

Our view - plus some advice.

We’ve always been fans of paying down debt so you can be mortgage-free. Being debt-free in retirement is a great goal!

But not everyone’s life fits the same template. We see plenty of clients with reasons to extend their loan terms or go interest-only, and we support them in their desire to pursue their own goals. More often than not, interest-only requests are temporary and just address a particular need at that time.

However, rules are rules, and it’s our role to help you get the outcome you want within the rules. So when we talk to you, we will take the time to find out your goals and how we can help you achieve them. Then we’ll use our knowledge of lenders and insurers to find the solution that works best for you.

The government may require lenders to ‘stress test’ loans, but we won’t add to that stress!

Get in touch and we’ll work with you to see what’s possible.