Why you can't borrow as much as you thought to buy a house

Banks want more information about how much people are spending before they will loan them money

Mortgage brokers say banks are asking for more details about people's spending habits which is clamping down on how much people can borrow.

John Bolton, chief executive of Squirrel Mortgages said historically banks in New Zealand had based a person's ability to service a loan on average household expenditure data gathered by the Government.

But now they were drilling down deeper into people's actual spending habits and it was reducing the amount buyers were able to borrow.

"To be honest people really don't know their expenses. It's been a kind of thumb in the air guess so everything has tended to revert to what is the norm/average for a household of that size.

Mortgage brokers say banks are asking for more details about people's spending habits which is clamping down on how much people can borrow.

John Bolton, chief executive of Squirrel Mortgages said historically banks in New Zealand had based a person's ability to service a loan on average household expenditure data gathered by the Government.

But now they were drilling down deeper into people's actual spending habits and it was reducing the amount buyers were able to borrow.

"To be honest people really don't know their expenses. It's been a kind of thumb in the air guess so everything has tended to revert to what is the norm/average for a household of that size.

"It is creating a significant reduction in borrowing capacity with a number of people."

Patten said banks were requiring a lot more detail.

Instead of just giving a figure for phone, rates, insurance and petrol, the bank wanted to see the average spend on petrol over the last three months.

At the same time, they wanted more details on other debt.

Patten said instead of wanting to know about hire purchases, banks wanted to know the balance, interest rate and when it was due to be paid back.

"They are getting really detailed in terms of what they have down on paper."

Mark Collins, chief executive of Mike Pero Mortgages, said a spend of $300 a month on things like Netflix, a gym membership, online gambling or gaming, could knock $50k off the amount a person could borrow.

"Even a KiwiBuild home at a maximum of $650k, if you have $50k knocked off because of Netflix it's quite a substantial amount of money you have to find from somewhere else."

He expected the change to be permanent.

"This is the new normal."

All three brokers pointed to Australia's Royal Commission into misconduct in the financial services industry as a driver for the change as well as pressure from local regulators the Reserve Bank and the Financial Markets Authority.

The inquiry revealed in March that Australia's banks were taking a lax approach to checking people's living expenses.

ANZ bank executive confirmed it did not check the accuracy of information provided by brokers about their customers' living expenses, even though it was the bank's responsibility to verify the financial situation of its customers.

The inquiry found banks routinely substituted data based on the Australian Bureau of Statistics' Household Expenditure Measure (HEM) when customers' stated living expenses were too low.

Brendan Spoules, a banking analyst at Citi group, said Australian regulators were now asking the banks to ensure they had expense information for 11 categories which was a big change from the haphazard way they had collected information in the past.

In New Zealand, the Reserve Bank has also widely talked about bringing in a debt-to-income ratio tool which would limit people's borrowing ability depending on their income.

Bolton said in the past the rule of thumb was borrowing five times a person's income with the probability of dragging it up to six times.

But now five times would be "bloody good" and it was normal for it to be somewhere between four and five times a person's income.

He said that change in affordability criteria particularly affected people in Auckland where a small tweak could have a big impact on what someone could borrow.

"We are ending up with a lot more borrowers who are a bit short of where they want to be."

"They want to borrow $700k but can only do $550k. It's not to say they can't buy - just not what they are hoping for."

Collins said people could make their situation better by clamping down on spending in the six months ahead of a loan application.

But Bolton said he believed it was more important that people demonstrate an ability to save.

"The days of just having a big deposit - through either a windfall from family or pulling it out of KiwiSaver - and that being enough are over."

"People need to show they can save."

Bolton said first-home buyers were generally okay as most had KiwiSaver and most were pretty good at saving.

But property investors were finding it tough and that was showing in the data where lending to investors had dropped.

"They are more leveraged because they have multiple properties and quite high levels of debt."

Bolton said banks saw the big red flags for first-home buyers as consumer finance debt.

"Banks don't like seeing it. Irrespective of how big your deposit is."

He said in one example was a borrower who had $50k in KiwiSaver and $15k to $20k in savings but offsetting that they had $15k in consumer debt.

"It not only reduces the amount you can borrow. But it also sends the message that you are not a good saver," he said.

Outside of that banks were also wary of other big commitments like child support or child care costs and school fees.

"First home buyers generally don't have a lof of that going on - it tends to be upgraders or investors."