The CCCFA and How It Affects Property Buyers
The CCCFA and How It Affects Property Buyers
Date Updated: 3 February 2024
The Credit Contracts and Consumer Finance Act (CCCFA) took effect on December 1, 2021. Its purpose was to prevent borrowers from being exploited by unscrupulous lenders. While the act's idea was to shield vulnerable consumers, its unintended effects have extended into the mortgage industry, influencing not only homebuyers but also people looking to invest in or upgrade their property. In this article, we will look at aspects of CCFA and how it impacts property buyers in the current market.
This article is current as of 3 February 2024.
What is the CCCFA?
The CCCFA requires moneylenders to perform a more thorough assessment of the borrower's capacity to repay the loans, which includes asking about living expenses and income. Although the act intended to offer better protection against predatory lending, it has posed some challenges to property buyers. The stern lending guidelines are changing how mortgages are approved, significantly affecting buyers' access to loans and their ability to enter the property market.
Why has the Credit Contracts and Consumer Finance Act made mortgages so hard to get?
The act sought to fix the loopholes of the previous Responsible Lending Code (2015), which some predatory lenders exploited. This updated law prescribes what lenders should ask during mortgage applications. Under the CCCFA, creditors must make various inquiries to ensure the applicant can afford the mortgage without enduring financial hardship. Additionally, the act requires that calculations by the banks must include "reasonable buffers" and "reasonable surpluses", but the said law doesn't provide a clear definition of these terms.
The senior management and directors of lending institutions are held liable in the CCCFA, which made these organizations adopt a more cautious approach in the approval process to ensure they are safe. For example, the CCCFA requires banks to compare the applicant's expected expenses to statistical benchmarks. This can result in inflated estimates. For example, a couple may have childcare expenses of $40 a month, but if the benchmark is at $250 a month, then the bank should use the latter amount for assessment.
What can applicants do to make getting a mortgage more achievable under the CCCFA?
Previously, banks understood that a homebuyer's spending habits will change once they purchase a house—cutting back on luxuries like daily coffees and frequent takeaways to prioritize mortgage payments. However, under the new act, a bank must be confident that the applicant's expenses are under control.
For you to be considered for a mortgage, you should demonstrate financial discipline in a way that you can comfortably cover mortgage repayments at an assumed interest rate of around 7% per annum.
Check out our article about creating a mock mortgage to help you prepare—it details the practical steps to strengthen your application.
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Does the CCCFA apply if you already have a mortgage?
If no "material change" is ever made to your mortgage—for example, paying your mortgage regularly—then the CCCFA shouldn't apply. However minor adjustments, such as altering your revolving credit account or a slight interest rate adjustment, can trigger a complete reassessment under the new regulations. Many borrowers will find that the mortgage they could afford a few years ago is now out of reach due to the stricter guidelines of the CCCFA.
Are there alternatives to the main bank lenders?
One challenge with bank lenders is that their decision-making is structured, meaning that multiple layers separate the mortgage assessors from the senior leaders. And as a result, there are more strict guidelines that leave little room for flexibility.
Smaller lenders, on the other hand, often have fewer layers of hierarchy, allowing that the management can take a more hands-on approach to assess each application. While the CCCFA doesn't define a "reasonable surplus," smaller lenders have more discretion in making these judgments case by case.
However, smaller lenders usually charge a higher interest rate—often 1% to 2% higher than major banks. Nevertheless, this could be a necessary trade-off for borrowers struggling to get financing approval from banks.
The CCCFA has affected the new lending landscape and made securing home loans challenging for new buyers. Navigating the new process requires preparation, financial discipline, and an understanding of how the CCCFA affects mortgage applications. By being informed and ready, buyers can improve their chances of securing a loan despite the CCCFA now being in effect.
