What is the CCCFA and how does it affect your mortgage?

If you already have a loan, you don’t need to worry about the Credit Contracts and Consumer Finance Act – the CCCFA for short. Just keep on making repayments and you should be fine.

But as soon as you want to take out a new loan, or make significant changes to your current mortgage, things could get tricky.

That’s because every lender in New Zealander has to follow the rules and processes set out in the Responsible Lending Code every time a consumer applies for credit. 

It could be a few hundred dollars to buy furniture, or a million dollars to trade up to your next home. There are no exceptions. 

Here are the key things to remember:

It’s not about you

It doesn’t matter how long you’ve been with the bank.

It doesn’t matter how much you’ve borrowed and repaid before.

It doesn’t matter how much equity you have.

Many of us grew up when these were the only things that mattered. You were a ‘loyal customer’, and the bank had a lot of discretion about offering you more money. That’s not the case anymore.

It’s not even about how much you earn. I’ve had borrowers on high incomes shocked to learn that the bank doesn’t want to increase their home loan. By the same token, someone on a lower income – but with a larger monthly surplus – might get a mortgage.

The last bit is key. It’s what the CCFA is all about.

CCCFA regulations and your home loan

To explain why CCCFA changes have led to banks going through your finances with a fine-toothed comb, it helps to understand why the government passed the Act in the first place.

The CCCFA requires lenders to act responsibly at all times. It’s designed to protect consumers from racking up debts they can’t service. So lenders these days have to take a 360-degree look at all your income streams and monthly expenses whenever you ask them for money.

The onus is on the bank to prove that you won’t be landed with a loan that sinks your household budget. To do this, they need information. Lots of it.

This comes as a nasty surprise to many of our clients. They have to provide reams of bank statements and detail all their recent outgoings

If you’ve been having a flutter on the horses or buying lots of Uber Eats, that’s no concern of ours – but the bank may take note. They will also tally up all your outgoings – including the worthy, ‘responsible’ payments – to see what’s going out of your bank account every month.

Here are just a few of the things they look for:

• Child support
• Private school fees
• Large contributions to Kiwisaver (i.e. 8%)
• Tithing, church and regular donations
• ‘Buy now, pay later’ schemes such as Afterpay and other consumer credit agreements
• Supporting your kids at university

The bank will also look at all your credit card limits. They want to know how much you can theoretically borrow, not just how much debt you currently have.

As you can see it’s a very intrusive process. It requires a lot of documentation. It has the effect of making many clients feel like the bank is grilling them about their personal affairs.

If you feel this way, you have our sympathy. We don’t regard it as our business to peer into your personal finances, but we do have to gather all this information before we can submit your loan application.

There are no shortcuts. No ‘quick phone calls’ we can make to bypass the CCCFA process. No exceptions.

The CCCFA and your monthly surplus

If you’ve read the Rich Dad books by Robert Kiyosaki, you’ll understand the concept of having a healthy monthly surplus of income over expenses. This is the key to building wealth.

The CCCFA isn’t there to make you rich, but it does force every borrower to look carefully at how much is going from their bank account every month. It puts a number on their monthly surplus.

Why does this matter?

We see many people who live a wealthy lifestyle. The more they earn, the more they spend. Others earn less but manage their outgoings carefully, so that they enjoy life but consistently generate a monthly surplus. These are the people who succeed at the Rich Dad game – and more to the point, get their loan approvals stamped.

Once you grasp this, the CCCFA shouldn’t be a surprise. It’s simply part of the loan approval process.

Tips to succeed with your CCCFA review

The first is simple – allow plenty of time. Talk to us well before you put in an offer on a house. We will guide your through the loan process so you can get all your ducks in a row. 

The second tip is to be proactive about your living expenses. If you are looking to buy your first home or upgrade your present one in the medium term, take a long, hard look at your monthly expenses in the year before you apply for finance.

We can help with some due diligence to make sure the monthly surplus is there, and spot any issues the bank might highlight with your monthly spending. Then you can be proactive.

It might mean cutting up a credit card, reducing Eftpos withdrawals from takeaway outlets, and other tweaks you can make to ensure the CCCFA won’t be a problem when you apply for a bank loan. 

Do this in the year before you need finance. We are more than happy to advise you at no cost. 

Here are some other questions people ask about the CCCFA?

Who enforces the CCCFA?

The Commerce Commission is responsible for overseeing the Credit Contracts and Consumer Finance Act (CCCFA). It has powers to investigate and punish lenders who are deemed to be irresponsible in lending to people who can’t manage their debts.

This is why the banks are such sticklers for the rules. They need to demonstrate that they’ve checked your income and expenses, to show that you have the financial headroom to service any loan they advance.

Remember, it’s not about you. The banks have to do this to stay on the right side of the law.

What is a consumer credit contract?

This is the catch-all term that applies to contracts between a consumer and a lender. If you apply for a credit card, take out a personal loan or borrow to buy a house, you are entering into a consumer credit contract.

It’s not new for banks to ask for a list of the consumer credit contracts you have when you apply for a loan. What’s different with the CCCFA is the way they also ask about things like church tithes and Kiwisaver contributions.

Bear in mind, they aren’t just checking your credit record. Under the CCCFA, they want to know how much money you have left over every month.

What is the Responsible Lending Code?

This is the Code that spells out what every lender in New Zealand has to do to avoid getting into trouble over the CCCFA. It’s the rulebook they apply when looking at your loan application.

The Responsible Lending rules are reviewed periodically but the principle remains the same. The government is directing lenders to avoid lending to people who are at risk of falling behind with their monthly repayments.

You may have seen news stories about people refused a loan because they bought some Christmas presents for their family. These hard luck stories led to a tweak of the CCCFA rules, to remove some of the more pettifogging restrictions. 

Hopefully, the rules will continue to evolve so banks can apply them in ways that don’t make life unduly hard for borrowers. But there will always be rules.

What is a consumer lease?

Some people ask us if a contract to lease goods, with an option to buy them, comes under the CCCFA? 

In most cases, it will.

Any lease contract where someone is leasing goods for personal use, and either has an option to purchase them, or the term of the lease is over 12 months, comes under the CCCFA.

So the bank will look at these monthly outgoings and check to see if you have the capacity to take on additional finance. That’s what the CCCFA requires.

Talk to us any time about CCCFA changes

As with most attempts to legislate human behaviour, the CCCFA can be complicated and require expert help. But the basic idea is simple.

You need to show you can handle the monthly repayments of any loan they offer. They will stress-test this number at various interest rates, look at your monthly outgoings, and tell you how much they can lend you.

The law requires this approach, so make life easy for yourself by being smart with the CCCFA.

We’re here to help you do just that.