(upbeat music)
- Hi, it's Connie from Prosperity Finance.
How are you?
My goal is to give you the timely insights and tips
to help you master the game of finance,
and ultimately help you achieve your goal.
Now, before, I was asked by many people that,
let's say, you don't really have much income,
but you have a property without any mortgage
or little mortgage.
You want to know why you can't borrow from the bank
because it doesn't make sense,
a bank has no risk, right?
You have a mortgage for a property
and they can take another property
when you purchase another property,
so they have a two property,
and you only borrow half a million dollar
against 2 million, you know, dollar properties.
Now, the reason the bank can't give you the loan,
despite they have no risks,
is because they are bonded by the credit contract,
and Consumer Finance Act,
also known as CCCFA or triple CFA.
So with that act, it give the banks,
kind of, requirements to make sure
they are responsible lender.
They don't put you into a financial hardship.
So in that example, if you don't have income,
you can't demonstrate your servicing ability.
Therefore, bank in breach if they give you a loan, okay?
Yes, they are safe, but they in breach of the triple CFA.
Now, you probably think why I'm talking about this today.
Well, it's very important because,
recently there was an amendment bill for triple CFA,
and as a result bank have to comply
with the new regulation from 1st December.
So, bank already is start working on their process
and lending policies and, you know, the paperwork required
to make sure that they are comply before the 1st December.
Now, as a result, your borrowing capacity
and requirements can be different.
So, today I'm going to talk about five areas
that was affected by triple CFA,
so that if you are aware now, you can better prepare
and get the best possible outcome,
when you're ready to borrow.
So let's start it now.
The first point I want to discuss is the rental income.
So, investment property is also a business, okay?
But unfortunately, government made announcement
early this year and saying,
"Hey, the interest rates, sorry, the interest costs
can no longer offset the rental from 1st October,
for any property purchase from 27 March, 2021.
I know it doesn't sound right, but this is the rule, right?
So as a result, some banks start changing
the way they recognize the rental income.
Now, banks do not require a financial statement
should be produced to recognize your rental income,
they basically take a percentage.
Now, before this triple CFA,
so they take about, you know, 70 to 85% of the gross rent
to take into account the vacancies,
the costs associated with running a investment properties,
such as property management fee and maintenance, et cetera.
But now they have reduced that percentage
to a lower number, so that they can, you know,
reflect the changes that
the government made early this year.
So what that means to you is if you have existing rental
property or you're looking to buy a rental property,
the income will be less than before.
Therefore the borrowing capacity will be less.
So, that's about the rental income recognition.
Now ASP only recognized 60%,
the lowest among other Aussie banks.
So just, you know,
the percentage and so that you can be prepared and know
which bank to go to, for your own situation.
The number two impact is to do with existing loan.
So you probably think what the existing loan to do with the
borrowing capacity. I mean,
paying the same amount every time.
Well, yes, you are paying the same amount,
but your repayment looks different from one bank
to the other. Because they will calculate your existing loan
based on number of factors, such as your repayments,
your loan maturity date, et cetera.
So it's a calculated figure rather than the actual figure.
So before this triple CFA changes, some banks
for example, Westpac and Bank of China,
If your loan are on interests only, you know,
you will get more lending with Westpac and Bank of China,
then any other banks.
Because the way they recognize the repayments is so
different.
They only add a small margin to your existing payment.
So if you are only paying interest
the payments pretty small.
Compared to other banks they will use principle
and interest approach.
And they also take into account your loan maturity date into
account.
But now they change as well.
Because if you only have 10 years to pay off the loan,
it's 10 years, it's no longer 30 years.
And if you have interest only loan,
they will take out the interest only period.
So it will further reduce the amortization period,
therefore reduce your borrowing capacity.
They no longer had that benefits.
So unfortunately for people have existing rental properties,
your borrowing capacity would significantly reduced
from now on.
The next point I want to make is a associated with
the new loan.
So, the driven factor is the test rates.
So, what is the test rate?
Test rate is a test interest rate
the bank use to test your borrowing capacity.
It's not the actual interest rate you you're about to pay.
Most of the banks have test rates around 6%, 6 to 7,
some slightly less, sometimes a little more,
but roughly about 6%, 6 and 5.
So they want to see if you can afford the loan at this
level, not at the current level.
Okay, because they give you a loan for 30 years
for most people, and they want to make sure
you can afford that loan for the 30 years,
not just for the next 12 months.
So that test rates,
some banks like ANZ BNZ has increased the test rates.
So, yes your borrowing capacity will reduce accordingly.
The good news is Westpac is the only bank
actually reduced the test rates.
So at the moment, Westpac
it's probably can lend you the most, if you are
first home buyers or you are the first time investors.
Okay?
But I'm not saying you should just go Westpac.
There's other consideration as well.
But in some borrowing capacity is more likely,
Westpac is very competitive.
Now the next point is to do with credit cards,
consumer accounts and the popular payment method
buy now pay later, like after pay.
Now, when I started becoming an advisor
that was almost 10 years ago.
If you have a credit cards, as long as you
pay off every month, you know, there's no impact.
But, I can't remember when was changed by probably three or
four years ago, bank change the policy
for recognizing the credit cards expenses.
So they basically used the limits as a measure and apply a
percentage, normally 3%.
So if you have a 10,000 credit card limits,
they will allow $300 every month
as credit card interest expense,
regardless if you pay, pay off or not every month.
Okay?
So the higher limit you have,
the more impact it has on the borrowing capacity.
Now it's getting even tighter. Should there are some banks
apply a higher percentage of your credit card limits.
So if you don't have to have a higher limits,
don't do it.
I know sometimes the banks and, you know,
different departments have a different priorities.
With a credit card departments, If they see
you have a good credit history, they will send you a letter
and say, hey, do you want to increase, cause you are
really good customer, and have a good account of conduct.
But then it comes to lending, the lending department say,
hey, you have lots of credit cards,
so you can spend all, if you want.
So I'm going to take into account as extra expense.
So it's going to punish you for your borrowing capacity.
So (chuckle) unfortunately this the way they operate.
So if you don't really need it,
don't take a high credit card you can reduce before you
apply for the loan.
Now, same apply to a store store card like Farmer's card,
like store card has limits.
It works similar to the credit cards.
It's also get tightened.
So it will have an impact on your borrowing capacity.
And finally is the, the buy now pay later,
like after pay.
It's really popular,
especially it doesn't really have any associated interests,
et cetera.
So why not?
A lot of people take it. I do as well.
But if you're looking to borrow money, don't take it.
They will treat it as a liability treat it as a loan.
So yeah, don't do it if you're looking to borrow, okay.
So that's to do with the cars and buy now pay later.
And finally, I want to talk about that living expense,
as a last point.
So living expense, why it's important
in the context of triple CFA?
Well, you may think you will spend less,
when you have more loan.
But bank don't believe that, okay.
So bank has their own calculated living expense based on
your family structure. Like how many adults, how many kids,
and they're also based on income level,
because they believe the more you earn, the more you spent.
I know it's not true for everyone, but this is their policy.
This is their belief. Okay.
So they have our minimum living expense
and then they compare with your declared expenses
and also look at your bank statement
to verify your declared expenses.
If your declared expenses or bank statements showing you
spent more than the bank minimum,
then they'd take your living expense number.
But if your living expense, the actual living expense
is less than the bank minimum, they use their number.
So it's obvious, the most conservative approach,
because they have to comply with the triple CFA.
So now they have these technology to scan your bank
statement and see what you spent on each category,
like food, entertainment, you know, travel, everything.
So they can see.
So if you're looking to borrow money,
be careful what's on your bank statements, okay.
Cause it will have very big impact
on your borrowing capacity.
They will also require you to declare in more details.
Like they have a lot of expense bucket
you had to fill out.
Very, very scrutinized at the moment.
And some banks even asked for evidence, for example,
they won't ask you for the cancel rates evidence,
the insurance evidence, rather than just a declared number.
Okay. So, be warned.
It's more paperwork. More question.
Yeah. So that's why it taking ages now to approve the loan,
but bank have to comply with the regulation, unfortunately,
and we have to apply as a financial advisor and you have to
apply otherwise they will reject your application. Okay.
So I guess we can't really change much, unfortunately,
the way we get treated now these days.
I think it's over killed.
But if you want to borrow money,
hey, you have to comply
because there's only so many banks in New Zealand
(giggles) Monopolies.
But what you can do is to be familiar
with those requirements
and make sure you are well prepared.
So we need to borrow money, you know,
you get the best possible outcome.
Okay. So I hope you find it useful today.
Now, if you have any particular personal question,
feel free to get in touch and we'll, you know,
give you our best advice. Okay.
Thank you so much. Please take care.
I will see you next time. Bye-bye