Understanding Affordability Assessments in Depth

The affordability assessment is the central test every mortgage application must pass, and in the New Zealand context it has become more detailed and more consequential since the Credit Contracts and Consumer Finance Act reforms took effect. For brokers, a deep understanding of how lenders assess affordability - not just in principle but in the specific mechanics of how expenses, income, and debt are treated - is one of the most practical skills you can develop.

How Lenders Calculate Surplus Income

At its core, an affordability assessment asks whether a borrower will have sufficient income remaining after all their committed expenses and proposed debt servicing to meet their day-to-day living costs and have a reasonable buffer. Lenders calculate this by taking the verified income, deducting committed monthly outgoings including the proposed mortgage repayments tested at a higher interest rate than the actual rate, and comparing what remains to a benchmark for living expenses.

The test rate - sometimes called the servicing rate or floor rate - is typically set by each lender independently and sits above the current market rate to provide a buffer against future rate increases. Lenders in New Zealand have applied test rates anywhere from one to three percentage points above the actual lending rate at various points in time, though these figures change with market conditions. Understanding what test rate each lender is currently applying, and how that affects a specific client's servicing calculation, is a practical input into lender selection.

Living Expense Treatment Under the CCCFA

The CCCFA reforms placed significant weight on how lenders assess living expenses. Rather than accepting a simple declaration from the borrower, lenders are required to conduct reasonable inquiries into the borrower's actual expenditure. In practice, this has meant many lenders asking for bank statement evidence covering a period of three to six months and reviewing actual spending across categories including food, transport, utilities, subscriptions, insurance, childcare, and discretionary items.

Where a client's actual expenses are higher than a lender's benchmark, the lender must use the actual figure. Where actual expenses are lower, many lenders still apply a minimum benchmark. Brokers who review a client's bank statements before submitting an application - identifying any expense categories that could be problematic and having a factual conversation about them - are better placed to choose the right lender and avoid declines.

Income Verification and the Complexity of Non-Standard Income

Salaried income is the most straightforward to verify - two recent payslips and a confirmation of employment typically suffice. It becomes more complex with variable income: commission, bonuses, overtime, rental income, self-employment income, and government benefits all have their own treatment across different lenders. Some lenders average variable income over two years; others take the lower of the past two years; others require a minimum period of receipt before including certain income types at all.

Understanding which lenders are most favourable to a client's specific income profile is a significant part of the value a broker provides. A client with a strong base salary supplemented by rental income and an annual bonus could have their servicing assessed very differently across two lenders using the same gross numbers but different policies. Running an informal serviceability calculation across two or three lenders before committing to an approach saves time and improves outcomes.

The Role of Existing Debt

All existing committed debt - credit cards, personal loans, hire purchase, student loans, car finance, and other mortgages - reduces the surplus available in an affordability assessment. Credit cards are typically assessed at a minimum monthly repayment calculated on the full credit limit, not the current balance, which can make unused credit limits a significant drag on servicing capacity. Clients who hold multiple credit cards with high limits but low balances sometimes find their borrowing capacity is meaningfully constrained by those unused limits.

A practical pre-application step is to review whether the client can close or reduce unused credit facilities before applying. This is not always possible or appropriate, but where it is, the servicing improvement can be significant. At Chaperone, helping brokers think through these pre-application steps is part of what makes the platform useful - because the quality of preparation before lodgement directly affects first-time approval rates and the overall client experience.