The CCCFA and How It Affects Property Buyers

Date Published: 3 February 2022

The Credit Contracts and Consumer Finance Act (CCCFA) came into force on the 1st December 2021 and was largely meant to protect consumers from high-interest loan sharks. Unintended effects of the act have flowed into mainstream mortgage applications. These are starting to show for home-buyers, upgraders and investors alike.

This article is current as of 2 February 2022.

What is the CCCFA?

The CCCFA effectively increases the liability for the directors and senior managers of lending companies. They are now personally liable if borrowing is shown to be irresponsible or deficiencies in the lending process are found. A fine of up to $200,000 for each breach is possible. As a result, banks and other lenders have tightened their application process. They are combing through every minute detail to make sure their process is correct.

Why has the Credit Contracts and Consumer Finance Act made mortgages so hard to get?

The act sought to fix the gaps in a previous version called Responsible Lending (2015); gaps that predatory loan companies took advantage of. The new act is more prescriptive in what lenders must ask for when assessing applications. Under CCCFA, lenders must make various inquiries into whether the applicant can afford the mortgage without enduring financial hardship. To that end there are additional requirements to verify documentation received. Calculations by the banks must include “reasonable buffers” and “reasonable surpluses”, but the act doesn’t detail how much these might be.

The problem is that with senior management’s personal liability at stake and no clear indication of what a “reasonable surplus” might be, the banks have had to go beyond the mark to ensure they are safe. For example, CCCFA requires banks to compare applicants’ expected expenses against statistical benchmarks to check whether they are reasonable. A couple may have childcare expenses of $40 per month because of a family arrangement however if the benchmark is $250 per month the bank must use this expense.

What can applicants do to make getting a mortgage more achievable under the CCCFA?

It was understood previously that homebuyers’ spending patterns would change once a house is purchased. To pay the mortgage, households would cut back on luxuries like daily coffees and multiple takeaways. But with the new regime, a bank must be confident that an applicant’s expenses are under control. That means taking the last 3 months of spending and calculating affordability from that.

In order to present yourself as a good applicant, therefore, you need to control your expenses. You need to demonstrate that, after all expenses (except rent), your income can still afford the mortgage you are applying for at ~7% per annum interest. We have an article on creating a mock mortgage that achieves exactly this.

Does the CCCFA apply if you already have a mortgage?

If no “material change” is ever made to your mortgage (ie; you simply keep paying your mortgage as usual) then the CCCFA shouldn’t apply. However, any change, whether it’s an alteration to your revolving credit account or a small interest only adjustment, would mean a complete review of your mortgage to make those changes. A lot of people will find that the mortgage they could afford 2 years ago is no longer within their reach.

Are there alternatives to the main bank lenders?

The problem with main bank lenders is that the management is so far removed from the actual staff who are assessing the mortgages. There could be 5 or more levels of employees between the directors and branch staff. As a result of this, strict guidelines must be in place. For smaller lenders, there may only be 1 or 2 levels from the directors to the assessment staff. This may mean they can take a more hands-on approach to assess each application on its own merits. Remember, we don’t know what a “reasonable surplus” is, however senior managers can make that call individually with smaller lenders.

These lenders may charge a slightly higher interest rate.  Typically it’s 1% to 2% higher than main banks but may well be the only option for many in the near future.

Has the CCCFA gone too far?

In short, yes. Under the previous legislation the mortgage assessment criteria was largely agreed to be responsible already. Mortgages were assessed at a much higher interest rate than was being paid at the time of settlement. Expenses were taken into account but were dealt with rationally.

A tightening of the availability of finance could mean a significant swing in the value of properties. With less buyers the prices could drop by a lot. While other levers are in place to also increase and decrease the availability of finance (Loan to Value Ratios, Debt to Income Ratios etc), these levers can be easily turned on and off to adjust how much people can borrow. The CCCFA is difficult to adjust quickly and could significantly affect how many people can borrow to purchase a house.

A parliamentary petition has been set up  for the government to take on board feedback and to give some clarity to the banks. The political pressure for change will likely only increase as more people are impacted. 

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