Can advisers adapt to regulatory changes and increased demand?
New Zealand's mortgage landscape is poised for a significant shift with the introduction of a debt-to-income (DTI) framework in the middle of this year.
While this regulatory change aims to ensure responsible lending practices, it also presents complexities that traditional borrower-bank interactions may struggle to handle effectively.
According to April Hastilow (pictured above) from Opes Mortgages, this is where mortgage advisers are expected to step up and play a crucial role in guiding borrowers through the evolving market and securing the best possible financing solutions.
But in a market where demand outweighs supply, balancing the increased value add and regulatory complexity with an ever-growing client book will likely remain a challenge for advisers.
“Where we aim to have eight client meetings, this week we’ve booked in 17,” said Hastilow. “Compliance-wise, advisers must ensure they have everything they need and are across the changes.”
“But my north star won’t change: Make sure you are doing the best thing for your client. That is what should guide advisers moving forward.”
How will the DTI framework be implemented?
The proposed DTI framework outlines limits on how much borrowers can borrow based on their income.
For owner-occupiers, the limit is set at six times their income, while investment property purchases might allow up to seven times, potentially excluding new builds.
However, like any regulatory change, complexities arise.
“What I think is always interesting is anytime a new regulation comes in, there is this almost [a] scramble for how it needs to be interpreted,” Hastilow said.
“They may have an overarching idea of what they want to do, but individual interpretations and legal considerations vary.”
For example, concerns exist in areas like student loan inclusion, which could impact future high earners despite their strong earning potential.
“This’ll affect people like pilots or doctors who may have high student debt but high future income,” Hastilow said.
Hastilow said she was “fascinated” to see how debt-to-income implementation varies across banks, treating different debts and incomes differently. This will likely impact their lending calculators, servicing criteria, and risk tolerance within regulatory compliance and policies.
“And then that flows down to how borrowers are actually able to borrow the money, which means as an intermediary between them, that changes what we do,” she said.
Regulation: a blunt instrument that softens over time
Hastilow's concerns are vindicated by how regulations were implemented in the past.
“Take the CCCFA for example,” she said, explaining that regulations often come in as a “harsh force” that is bluntly implemented.
But as it gets tested in the real world, differences emerge. Adaptations and mending of policies occur as unintended consequences become clear.
Hastilow worries that consistency in how different banks interpret and apply rules, like deposit requirements and income assessment, could vary greatly.
“I think there could still be quite a lot of variation between the banks, which appears to be something that the regulators don't want, but yet there naturally is,” she said.
This inconsistency highlights the critical role of mortgage advisers in an evolving market, which, in Hastilow’s view, will lead to higher adviser market share.
Traditionally, borrowers might have relied solely on their bank manager for mortgage advice. However, as Hastilow points out, the evolving regulatory landscape has already fundamentally changed the dynamics of borrowing.
"There was a time when simply walking into your bank manager's office and relying on their personal familiarity could help secure credit," Hastilow said. However, the increasingly complex regulatory environment has rendered such an approach impractical.
In this new landscape, the question becomes: who is your trusted adviser?
“You may have a client that walks into one bank, gets told no, but gets told yes in another, and that's where brokers become more important in an uncertain or changing market,” she said.
“We currently sit at around 55% of residential deals in the market. That’ll grow as we become more valuable.”
Why collaboration between banks and advisers is essential
Far from ignorant to the changes blowing in the wind, banks and lenders have positioned themselves for this changing of the guard.
Hastilow has noticed “more synergy” between banks and advisers, with banks increasing their broker teams and handling greater volumes through the third-party channel.
“Banks are working with advisers more and more lately,” she said. “We see Kiwibank coming in and working with brokers while challenging the Australian-owned banks, which is really promising as it promotes competition in the market.”
With advisers already under pressure with the current market volatility and high demand, Hastilow urged the industry to continue to work together through these challenges.
Client expectations are shifting. Some individuals who held back are jumping in due to perceived capital gains and potential future interest rate decreases,” she said. “Others remain stressed and unsure.”
While the blunt tool used to control the debt-to-income ratio might not make much difference initially with higher interest rates, data suggests it could take significantly longer for people to buy homes in the future.
Hastilow said this was concerning, particularly in light of the already tight rental market.
“Restricting investors too much could further strain the rental market unless significant government intervention occurs, especially considering the high and increasing immigration numbers placing additional pressure on housing availability,” she said.
“At the end of the day, there's a borrower at the end of these changes who's trying to get the money to fulfill their dreams, and as advisers we must do our best in whatever conditions lie ahead.”
How do you think DTI will impact borrowers and advisers? Comment below.
