NZ Level 5 Residential Property Lending common mistakes
NZ Level 5 Residential Property Lending · Understand the traps and how to avoid them.
Treating the responsible lending affordability test as a simple arithmetic pass/fail on stated income, and approving a loan where the surplus after expenses is positive but the expense figure was taken from the customer's unverified statement rather than benchmark or verified transaction data.
Candidates study the servicing formula in isolation and practise calculation drills, so they default to 'numbers clear, approve' and forget that the assessment must rest on verified and reasonably estimated expenses, not the customer's optimistic self-report.
What to do instead
Before any servicing arithmetic, write the evidence source next to every income and expense line (payslip, bank statement, credit report, benchmark). If any expense line has no evidence, apply the higher of the customer's declared figure and a reasonable benchmark, then re-run the surplus. Practise by taking a case file and marking each line 'verified' or 'estimated'.
Calculating loan-to-value ratio on the purchase price only when the borrower is refinancing, or when a registered valuation differs from the contract price, and then quoting a product or low-equity premium off that wrong LVR.
Most practice examples are purchases where price equals value, so candidates memorise 'loan divided by price' and never internalise that lenders use the lower of purchase price and assessed value, and for refinances use the assessed value alone.
What to do instead
Adopt a fixed habit: state the purpose (purchase, refinance, top-up), then state which value base applies, then compute. For purchases use the lower of price and valuation; for refinances use the valuation. Work three variants of the same property (price above valuation, price below valuation, refinance) and confirm the LVR differs correctly each time.
Describing the CCCFA lender responsibility principles from memory as 'lenders must act responsibly' without naming the specific steps: making reasonable inquiries, exercising care and skill, ensuring the loan meets the borrower's requirements and objectives, and complying with affordability and suitability expectations.
The principles read as a short list of broad duties, so candidates paraphrase the headline and assume markers will accept the gist. Markers are looking for the discrete obligations and how they map to the lender's process.
What to do instead
Build a one-page map of the lender responsibility principles, each with two concrete process examples (for example, inquiries = verified income plus expense breakdown; suitability = matching term and structure to the stated purpose). Memorise the process examples, not just the headings, and rehearse explaining each principle in two sentences.
Missing that a loan structure choice (interest-only period, offset, revolving credit, split fixed/floating) changes both the servicing outcome and the suitability judgement, and recommending interest-only purely to make the numbers pass.
Candidates treat structure as a product-selection afterthought once servicing is approved, and use interest-only as a fix for a tight surplus without asking whether it suits the borrower's objectives or increases risk at rollover.
What to do instead
For every scenario, run servicing at the actual structure and at the fully amortising equivalent, then state why the chosen structure fits the customer's objective and how the borrower will handle the revert. Note the rollover risk explicitly in the recommendation.
Answering AML/CFT questions by naming 'know your customer' generically, without identifying customer due diligence tiers, beneficial ownership identification for trusts and companies, source of funds versus source of wealth, or the obligation to report suspicious activity.
The AML/CFT regime is dense and candidates skim it, so they retain the acronym and lose the operational detail that the exam tests through scenario questions about a trust purchase or an unexplained deposit.
What to do instead
Learn the four pillars separately: risk assessment, customer due diligence (standard and enhanced), ongoing monitoring, and suspicious activity reporting. For each, write one worked example, including a family trust with multiple trustees and beneficiaries, and distinguish source of funds from source of wealth in a sentence you can reproduce.
Confusing disclosure timing and content obligations, for example stating that the initial disclosure must be given at or before the loan offer, or omitting that fees, total advance, interest rate and repayment terms must be disclosed before the borrower is committed.
Disclosure rules sit across several instruments and candidates blur the pre-contractual disclosure with the credit contract and the continuing disclosure duties, so timing answers drift by a stage.
What to do instead
Draw a timeline of the loan lifecycle (inquiry, application, approval, contract, drawdown, ongoing) and place each disclosure obligation at its correct point with its required content. Test yourself by covering the timeline and reconstructing it, then check the specific items that must appear in each disclosure.
Treating a guarantor as a formality and not assessing the guarantor's own financial position, the extent of the guarantee, or whether the guarantor understood the risk and received independent legal advice.
Candidates focus on the primary borrower's servicing and see the guarantee as a credit-strength checkbox, overlooking that the guarantor is a separate customer with their own vulnerability and disclosure entitlements.
What to do instead
For any guaranteed scenario, run a parallel mini-assessment of the guarantor: their income and assets, the maximum liability, whether the guarantee is limited or unlimited, evidence of independent advice, and a record of the explanation given. State these five points explicitly in every answer involving a guarantee.
Handling a hardship question by describing 'the lender should be sympathetic' rather than setting out the process: recognising a hardship notice, assessing whether the borrower can reasonably meet obligations, agreeing a variation, and recording and reviewing the arrangement.
Hardship feels like a soft topic, so candidates answer with empathy language and skip the procedural steps and timeframes that carry the marks.
What to do instead
Memorise the hardship sequence as a numbered flow: receive and acknowledge, request financial information, assess, propose a variation, document, monitor and review. Attach a timeframe and a record-keeping action to each step, and practise applying it to a job-loss scenario and a rate-shock scenario.
Recommending a product or lender based on a rate comparison alone, without documenting the customer's needs, priorities and trade-offs, or recording why alternatives were rejected.
Rate is the easiest variable to compare and candidates default to it, forgetting that suitability requires matching features, term, flexibility and risk tolerance to the customer's stated objectives, and that the reasoning must be evidenced.
What to do instead
Use a structured needs-analysis template: objectives, timeframe, risk tolerance, flexibility needs, exit strategy, and priorities ranked. Then write a two-line justification for the recommended option and a one-line reason for each rejected alternative. Practise until the justification is automatic.
Ignoring insurance and risk-mitigation conditions attached to a loan, such as the requirement for house insurance, mortgage repayment insurance or a registered valuation, and not checking they are satisfied before drawdown.
Candidates treat these as settlement administration rather than credit conditions, so scenario questions about drawdown readiness get answered without mentioning the outstanding conditions.
What to do instead
Before concluding any approval or drawdown scenario, run a conditions checklist: insurance in place and noted, valuation obtained and acceptable, guarantee executed, AML complete, solicitor confirmation received. State which conditions are outstanding and who must action them.