Discretionary expenses a 'bone of contention', says mortgage expert
Further changes to the Credit Contracts and Consumer Finance Act are expected to give some relief to new mortgage borrowers, as well as those refinancing to a different lender.
The changes, which come into practice from May 4, represent “welcome news for many”, Jarrod Kirkland (pictured above left), national manager mortgages at The Mortgage Lab said. It will be interesting to see whether spending on Netflix and gym members are viewed as discretionary in the true sense, or captured as regular outgoings, he said.
Changes to the CCCFA were introduced on December 1, 2021. The changes were aimed at protecting consumers from unaffordable debt, prompting lenders to make enquiries to ensure that loans were suitable and affordable.
The level of evidence required for affordability assessments increased. A more conservative approach adopted by lenders drew criticism that the changes were overly prescriptive, making it difficult to obtain finance.
In 2022, Minister of Commerce and Consumer Affairs Duncan Webb (pictured above right) commissioned an investigation into the changes, leading to further amendments, the first of which came into effect on July 7 last year.
In a media release dated April 6, Webb said that changes the CCCFA coming into effect on May 4 would explicitly exclude discretionary expenses from affordability testing.
The changes also provide “more flexibility for lenders” on how certain repayments (i.e. buy now pay later) are calculated and extend exceptions applying to full income and expense assessments for refinancing of existing contracts, Webb said.
Kirkland, who is also the director of MTG Mortgages, told NZ Adviser that banks started to adopt many of the CCCFA changes before they were formally introduced.
Similarly, banks have again moved to adopt some of the amendments in force from May 4, he said.
Kirkland said that banks’ treatment of discretionary expenses has been a “bone of contention” throughout the CCCFA period. They held the assumption that what borrowers spent at the time of application would be the same as after their home purchase, he said.
“This was a real head-scratcher for a lot of clients, with most sensibly suggesting they would simply cancel discretionary items if they couldn’t afford them – simple finance 101,” Kirkland said.
Under the first round of CCCFA changes, Kirkland said that savings and investments were considered an expense. This hindered many borrowers who had been saving to buy a home, with the intention of stopping these payments once their goal was achieved, he said.
Kirkland said that assessment of discretionary expenses such as Netflix and gym memberships had “narrowed considerably”.
“What will be interesting is how Netflix and gym memberships will be treated, as although these are discretionary in the true sense, it could also be argued these are regular outgoings which must be captured,” he said.
Good payers likely to benefit from refinancing change
For borrowers with the proven ability to repay debt, Kirkland said that the expansion of exceptions relating to full assessments when refinancing to another lender was likely to be a “game changer”.
One example was borrowers who used credit cards to pay day-to-day expenses and repaid the balance in full each month, which Kirkland said currently led to a “double counting of expenses”.
“Customers have been obligated to list their expenses as normally required but will also typically have 3% of their limit counted as an expense as well,” Kirkland said.
This meant that on a $10,000 credit card, a monthly assessment of $300 would be added to the borrower’s affordability assessment, he said. The incoming CCCFA change is likely to “remove these anomalies” in the assessment process.
“If the client can evidence a good repayment history and ability to manage debt at current levels, refinancing and debt consolidation should be easier to access,” Kirkland said.
“I have had numerous occasions where clients were maintaining their mortgage repayments and higher interest short term debt and were told that refinance and/or debt consolidation could not be done because they ‘couldn’t afford it’ – even with ample evidence of them managing just fine.”
Irrespective of the CCCFA changes coming into force, from a compliance perspective, Kirkland said that mortgage advisers were still obligated to carry out a full analysis of a client’s expenses.
The analysis ensures that clients are not being put in a situation which may cause financial duress, he said.
Will the incoming CCCFA changes make a positive difference to mortgage borrowers? Share your thoughts in the comments section below.
