As of 31 July 2024, the New Zealand Government has loosened the Responsible Lending Code rules. The changes mean a less frustrating application process for borrowers and more flexibility for lenders to determine eligibility for a loan.
What is the Responsible Lending Code?
The Responsible Lending Code is managed under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). All lenders must follow the code. Its purpose is to ensure that lenders only lend amounts the borrower can afford to repay. It also ensures that the terms and conditions lenders bake into their contracts, are reasonable. It’s an essential part of the checks and balances that protect borrowers and the economy from financial stress.
What are the changes to the Responsible Lending Code?
The significant changes concern the rules lenders must follow when calculating how much debt a borrower can afford. If a lender doesn’t adhere to these rules, it is open to expensive sanctions.
The challenge in recent years has been that the rules were conservative and onerous. The banks were conservative in their interpretation of the rules, to ensure that they didn’t make any decisions that could be deemed outside of the regulations. Hopeful borrowers were required to justify spending on coffee and Uber Eats. There have been plenty of stories of people missing out on loans due to discretionary spending. The rigour of checks was eased a year ago, and the latest changes reduce it further.
We see this as a positive move. The code still requires lenders to demonstrate that they’ve worked out whether a borrower can afford a loan. But now, they have the flexibility to use common sense and allow for the countless differences in borrowers’ circumstances.
The updated code acknowledges that while some expenses like repayments or insurance premiums cannot be reduced, discretionary expenses like takeaways and holidays can be reduced or eliminated and aren’t actual living expenses. Borrowers shouldn’t be required to prove they can continue to afford those things when getting a home loan, as generally borrowers reduce discretionary spending when needed.
Platinum Mortgages is a full-service mortgage advice company. We work with clients over their lifetimes to achieve their financial goals, and ensuring affordability is part of that. As part of our support service, we educate clients on the changes in finances that come with a home loan in general and with their loan specifically.
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