KEY POINTS:
The credit crisis that started half a world away is hitting renovators and first-home buyers.
A combination of falling house prices, rising living costs and higher prices for overseas money is forcing banks to tighten their lending policies.
Worst affected will be those borrowing a high proportion of their home's value. But all borrowers now face tougher tests to prove they can pay back a loan.
ASB drastically tightened its lending rules this week, telling brokers that it would generally not lend more than 80 per cent of a home's value.
Its head of retail banking, Ian Park, said ASB would consider applications for more than 80 per cent, "but they will have to be very strong from a servicing perspective".
A year ago, all main banks would lend up to 100 per cent of a home's value.
When house prices were rising and the economy was strong, up to 40 per cent of first-home buyers were getting 100 per cent loans, brokers say.
Massey University banking expert David Tripe said consumer credit had been tightened as banks took a less rosy view of borrowers' prospects.
ASB has also stopped giving "low doc" loans - the credit once advanced to high-earning business people who did not have all the documents to prove their income.
In March, Westpac changed its lending policy to require faster repayment of mortgages that had a high ratio of debt to value.
ANZ and National changed their rules early this year to make it more likely that anyone seeking more than 80 per cent of a home's value would be asked for a registered valuation.
Spokeswoman Virginia Stracey-Clitherow said the two banks had adjusted their assessments of living expenses to take account of rising costs.
ASB is also taking increased food and petrol bills into account.
Mr Park said borrowers' ability to repay a loan was more important than the amount of equity they had in the home.
Borrowers have also become more careful about what they can afford.
Westpac spokesman Craig Dowling said borrowers were realising they could not afford to borrow heavily.
"In the past, people extended their mortgages ... for things like renovating with a higher degree of confidence that the value in their homes would continue to rise," he said. "That confidence has diminished."
Mastercard New Zealand manager Stuart McKinley said spending and credit extensions on credit cards had slowed since December.
Annual spending growth had dropped from 10 per cent to 4.4 per cent by June, and credit limit extensions went from 7.5 per cent to 4.4 per cent.
The Reserve Bank says New Zealanders owed $5.1 billion in business and personal credit card debt at the end of August.
Dr Tripe said lending would stay tight "for a while" but this would have little effect on people with good equity in their homes.
"But if people have got 85 per cent borrowed and want to borrow a bit more it will be quite difficult."
The chief executive of the 45- branch Mike Pero (NZ) mortgage broking business, Shaun Riley, said it was "not quite accurate" to say banks would not lend more than 80 per cent of a home's value.
"There are still deals being done above that, but the banks are being more selective and applying tougher servicing criteria than a year ago."
THE LOAN SQUEEZE
* Banks are now More likely to ask for a registered valuation if you are borrowing a high proportion of your home's value.
* More sceptical of self-employed people claiming a high income without strong documentary evidence.
* Less likely to lend a high proportion of your home's value. ASB has stopped lending above 80 per cent, except in very strong cases.
But don't sweat it
* Banks will work with you to manage debt.
Options to consider
* Suspend mortgage payments.
* Extend the mortgage term to reduce payments.
* Put credit card debt into the mortgage.
* Reconsider borrowing for large-scale renovations.
- Anne Gibson
