CCCFA: How it affects development, lending & the property market
It’s harder than ever to get a mortgage in New Zealand thanks to one law and five letters - the CCCFA (Credit Contracts and Consumer Finance Act). Recent amendments to this legislation in December 2021 have caused a tightening of the mortgage market, with lender’s putting a microscope on the personal spending of borrowers.
There have been several reports of borrowers being denied funding by their banks due to their spending habits, which may include how often they purchase takeaway food or spending too much on clothes.
What’s changed about the CCCFA?
The CCCFA was put in place in 2003 to protect consumers entering credit contracts and consumer leases. However, in December 2021 a raft of changes to the act were introduced, including the following:
Companies must comply with new, stricter advertising standards.
Lenders are required to keep better records of how they satisfy affordability and suitability requirements and how they calculate fees.
Directors and senior management must exercise due diligence to ensure their organisation complies with the CCCFA.
The latter change has caused lenders to become overly cautious when ensuring borrowers can afford financial products, due to the risk of directors being fined up to $200,000 per breach.
Wide ranging and unintended consequences
Changes to the CCCFA have had wide-ranging unintended consequences. In fact, during the first quarter of 2022 lenders received 42% fewer home loan applications than they did during the same period last year, data from the Consumer Credit Demand Index shows.
The biggest impact has been on first home buyers - it’s now even more difficult to enter the property market for this segment. But that’s not all:
The size of the average New Zealand home loan has also decreased by 6.8% or $25,000, according to credit bureau Centrix.
Overall home loan lending fell by 30% during Q1 2022.
The conversion rate on home loan applications dropped from 40% to 36%.
This squeeze on credit availability has undoubtedly contributed to Auckland's house prices decreasing by 1.8% in April 2022, as detailed in our May Market Report. As a result of these unintended consequences the government has again tweaked the CCCFA aiming to soften its effect on mortgage approvals and free up credit availability.
These tweaks include not requiring banks to check current spending from recent transactions, and not classifying savings and investments as outgoings. But the NZ Bankers Association has claimed that the changes will have a negligible impact on mortgage approvals and a more indepth review is required.
The liability of company directors has been identified as a section of the CCCFA that must be amended or removed in the coming review.
Navigating development finance in an uncertain environment
Unfortunately the CCCFA changes and property market uncertainty have made property development more challenging.
The legislation has had an impact on the preselling of developments off the plans. This is due to the difficulty purchasers are having getting pre-approval from their banks which has caused a greater potential for purchaser defaults come settlement time. This can make borrowing from traditional lenders to finance development projects more difficult and time consuming.
Fortis Capital take a different, more flexible approach to development finance, removing the requirement to achieve pre-sales early in the development process. We can help you progress your development without being held back by having to sell your product off the plans. Get in touch with us today and we’ll tailor a package to meet your financing needs.