Why Banks Say No

Why Banks Say No to Borrowers in New Zealand

Navigating the financial landscape in New Zealand can be challenging, particularly for those seeking to secure loans. Despite a relatively stable economy, many borrowers find themselves facing rejection from banks when applying for finance. Understanding the reasons behind these denials is crucial for anyone looking to obtain credit and better manage their financial future.

One of the primary reasons banks say no to borrowers is the tightening of lending criteria. In recent years, regulatory bodies such as the Reserve Bank of New Zealand have introduced stricter lending policies to ensure financial stability. These include higher deposit requirements, particularly for property loans, and more stringent checks on a borrower's ability to repay the loan. This means that even slight blemishes on a credit report or a lack of sufficient income can lead to a declined application.

Another factor contributing to loan rejections is the rising concern over debt-to-income ratios. Banks are increasingly cautious about lending to individuals who have high levels of existing debt relative to their income. This cautious approach is designed to prevent borrowers from becoming over-leveraged, which could lead to financial difficulties and increased risk of default. Consequently, those with significant debts or lower income levels may struggle to secure additional finance.

Economic conditions also play a significant role in a bank's decision to approve or deny loans. During times of economic uncertainty, such as during global financial crises or local downturns, banks tend to be more conservative with their lending practices. They may tighten their criteria further, making it even more difficult for borrowers to qualify for loans.

Let’s look at some of these options further:-

Serviceability

Serviceability refers to your ability to meet the repayment requirements of a loan. It’s a critical factor that banks and lenders assess before approving a loan application. Here’s a more detailed look at what serviceability involves and how it affects loan approval:

 Key Factors in Assessing Serviceability

Income

• Regular Income - Lenders look at your regular income from employment, which includes your salary, wages, and any other consistent income sources.

• Additional Income -: This can include rental income, dividends, bonuses, and other sources that contribute to your total income.

 Expenses

• Living Expenses: Banks estimate your regular living expenses, which include food, utilities, transportation, insurance, and other daily costs.
• Existing Debt Obligations: Your current loans, credit card debt, and any other regular payments are considered to see how much of your income is already committed.

 Loan Amount and Term:

• The amount you want to borrow and the term over which you plan to repay the loan impact serviceability. Larger loan amounts and shorter terms increase monthly repayment amounts, which can affect your ability to service the loan.

Interest Rates:

• The interest rate on the loan directly affects your monthly repayments. Higher rates mean higher payments, which can impact serviceability.

 Buffer for Rate Increases:

• Lenders often assess your ability to service the loan even if interest rates rise. This stress testing ensures you can still make repayments in a less favourable economic environment.

 Employment Stability:

• How long have you been in your current position.  Stable employment with a steady income is crucial. Lenders prefer applicants with a consistent job history over those with frequent job changes or gaps in employment.

 Rental income

• Banks can scale rental income higher than what a non-bank might do.

 
Steps to Take To Improve Serviceability

Increase Income:

• Look for ways to boost your income, such as taking on additional work, seeking a higher-paying job, or developing passive income streams.

 Reduce Debt:

•  Pay down existing debts to lower your debt-to-income ratio. This can also improve your credit score, making you a more attractive borrower.

 Minimise Expenses:

•  Cut unnecessary expenses to increase your disposable income, which can improve your serviceability assessment.

 Choose a Longer Loan Term:

• Extending the loan term reduces monthly repayments, improving your ability to service the loan, although it may increase the total interest paid over the life of the loan.

 Provide Complete Documentation:

• Ensure you have all necessary financial documents ready. This includes pay slips, tax returns, financial statements, and any other evidence of income and expenses.

 Maintain a Stable Employment Record:

•  Lenders prefer applicants with steady employment. Avoid frequent job changes and try to establish a solid work history.

 

Lastly, the purpose of the loan can influence the bank’s decision. Banks often prefer to lend for lower-risk purposes, such as home loans, rather than for higher-risk ventures like starting a new business. Borrowers seeking finance for riskier purposes may find it harder to obtain approval.

Understanding these factors can help borrowers prepare better, improving their chances of securing the finance they need in New Zealand’s evolving financial landscape.

I hope that you find these lending tips and strategies useful to you.

If you are looking for assistance, please contact us today.