Why the government is changing the mortgage rules
Scott Morrison wants to make it easier for Australians to get home loans.
That’s why the government plans to remove the ‘responsible lending obligations’ from the National Consumer Credit Protection Act 2009, a law that regulates how lenders issue mortgages.
If this reform is passed by parliament and introduced in March 2021, as the government hopes, it should lead to an easier and faster home loan application process, according to OpenFinance senior mortgage broker Amanda Gleig.
That’s because the point of removing the responsible lending obligations is to shift responsibility from the lender to the borrower.
Ms Gleig said the responsible lending obligations were introduced by the Rudd government, a decade ago, because it wanted to protect borrowers from the predatory lending practices it believed were being followed by some credit providers.
The result was that lenders started forcing borrowers to clear a higher bar to qualify for a mortgage. Lenders raised that bar even higher during the banking Royal Commission, which lasted from 2017-19, because they were worried about legal action from borrowers who defaulted on their loans.
Ms Gleig said nervous lenders now forensically examine every single detail of a borrower’s bank statements.
“I’ve had clients earning $400,000 per year who have been questioned about $4 payments – that’s as far as banks have been going in analysing things.”
Lenders will use more common sense when assessing loans
Under the new system, lenders will still have to make sure borrowers can afford to repay any home loans they apply for, according to Ms Gleig. However, the current “prescriptive” assessment system will be replaced by a “common sense” system.
Lenders will no longer need to forensically examine every little detail; only things that seem unreasonable or unreliable.
Ms Gleig said first home buyers and self-employed borrowers will be the big winners.
Some first buyers are currently being denied loans because lenders must assume all their discretionary spending (buying clothes, using Uber Eats, etc) will continue if they get a mortgage. However, Ms Gleig said a typical first home buyer would cut this non-essential consumption to meet their mortgage repayments – which lenders will be able to recognise under the new system.
Meanwhile, some self-employed borrowers are currently being rejected because lenders are “double-dipping” with expenses. Business owners often pay their phone, internet and transport bills through their business – and lenders are not only counting these as business expenses but also assuming the borrower is racking up similar bills in their personal name. The new system will allow lenders to take a more reasonable approach in this situation.
Get expert help if you feel confused
Ms Gleig said that while the government’s proposed reforms strike a reasonable balance, they will force borrowers to take more responsibility for their loan applications – which could be difficult for people with limited financial knowledge.
Her advice was to consult an expert, such as a mortgage broker, when applying for a loan.
“That way, people won’t find themselves in a situation where they forget to declare important information and open themselves up to financial distress.”
If you want to have a no-obligation chat with a strategic mortgage broker, send a quick email to email@example.com, put “I WANT TO DISCUSS MY FINANCIAL GOALS” in the subject line, and we’ll be in touch.
The government recently announced it would remove responsible lending obligations from the National Consumer Credit Protection Act 2009. What does that mean?
-Responsible lending was introduced by the Rudd government, after the GFC, in the form of the NCCP
“It’s main aim was to shift responsibility from borrowers to lenders and protect them from what the government called ‘predatory lending practices’ and taking on loans they had no chance of repaying. Those responsible lending regulations were reexamined during the Royal Commission and then led to further tightening of lending criteria by banks, out of fear borrowers would pursue legal action if they couldn’t repay their loans.”
-ASIC and APRA regulate the banks
-ASIC focuses on protecting consumers, while APRA focuses on risk management
-The responsible lending reforms propose to take ASIC out of the picture
-Banks will still need to follow the Banking Code of Practice, but this is far less prescriptive than the responsible lending guidelines in the NCCP
-APRA will still make sure banks are lending responsibly
-But APRA doesn’t have a role in consumer protection
-It will now be up to the consumer to look out for their own interests
“The government wants to cut the red tape and – as they see it – remove barriers to lending. They’re hoping that by removing a second level of prescriptive rules, they’ll allow the banks to lend with common sense, and without needing to go into as much prescriptive detail as required by ASIC.”
From a consumer perspective, what are the pros of this reform?
-It will lead to an easier and faster application process, for borrowers, brokers and lenders
-Lenders will only need to investigate application details that seem unreasonable or unreliable
-So lenders will no longer need to forensically examine every single detail of a borrower’s bank statements
-Borrowing capacity should rise once lenders change the way they calculate living expenses
“I’ve had clients earning $400,000 per year who have been questioned about $4 payments – that was as far as banks were going in analysing things.”
“Clients may have been spending $3,000 per month on groceries and were being declined loans, but because much of this was discretionary spending, if they had been approved, they would’ve had the potential to reduce that grocery bill to, say, $1,000 per month. But the banks were taking into account people’s ability to adjust their spending patterns. They were just assuming that what the client was spending right now would be the future reality.”
From a consumer perspective, what are the cons of this reform?
“All responsibility will fall back to the borrower to provide complete and accurate information. Not all consumers are educated around finance, so they might want to seek the assistance of somebody who could help them apply for finance, so they don’t find themselves in a situation where they don’t declare something and open themselves up to financial distress.”
-Some financial counsellors have criticised the reforms for weakening lending standards, and fear people will get loaded up with debt
-Other consumer advocates have said it’s not fair to put all the responsibility on the borrower
Do the reforms strike a reasonable balance?
“Lending in Australia is so balanced. We don’t have a lot of the problems that they experience overseas. We have so many different layers of regulation and risk management. We lend incredibly responsibly in Australia, because there are so many checks and balances in place.”
For people who have a mortgage, will this reform make it easier to refinance?
“It will be a faster application process. There will be less documentation required because there won’t be a forensic examination of every part of a borrower’s life.”
Is now a good time to refinance?
“Rates have never been lower, so anyone who hasn’t refinanced recently should think about taking advantage of those rates. There are some really great cashback offers out there, of up to $4,000 per property, which cover all the fees and charges associated with refinancing. Banks are open for business at the moment, especially for anyone working in an industry that hasn’t been affected by Covid.”
Is there anything else you think worth mentioning?
-The proposed changes still need to be approved by parliament
-The government wants the changes to become law by March 2021, but even if that happens, lenders will still need time to adjust their individual lending criteria
-The reforms will help first home buyers, who have high levels of discretionary spending that can be wound back once they get a mortgage
“If they want to keep their home, they will change their spending patterns.”
-The reforms will also help self-employed borrowers
-A lot of them pay phone, internet and transport bills through their business, but banks have been double-dipping (counting these as business expenses and also assuming borrowers are racking up similar personal bills)
Ms Gleig said that would probably mean:
- Home loan applications will be processed faster
- Borrowers won’t have to provide as much paperwork
- Some people will be able to borrow more money
- First home buyers and self-employed borrowers will be the big winners