What the incoming credit crisis means for you
The lasting legacy of Australia’s Covid crisis could end up being a credit binge that brings families to their knees.
Claiming it is “all about the consumer”, Federal Treasurer Josh Frydenberg has announced a massive relaxation in lending rules.
Sounds good, right? Because credit has been hard to get, whether a credit card, personal loan or particularly, home loan.
In reality, the changes wipe away 10 years of progress building up protections for consumers from getting in over their heads – the very reason they’ve been condemned by consumer advocacy groups such as CHOICE, Financial Counselling Australia and Consumer Action Legal Centre.
What the government is proposing represents a huge swing – and potential financial sting – from “lender beware” to “borrower responsibility”.
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What’s been proposed
Should the reforms past parliament, there are several vital things that will change.
The first is that what I call the Netflix Test, where you have to show your every expense for the three months previous to applying for a loan, will be abandoned.
Instead, it’s likely lenders will be able to go back to using something like the household expenditure measure, which gives a generic possible-expenses estimate.
This is all about the wagyu and wine Federal Court case you may have heard about. The corporate watchdog ASIC brought an action against Westpac, for failing to go through borrowers’ expenses line-by-line.
It lost. Twice.
Famously, the Federal Court Judge Nye Perram’s opinion said this was not necessary because it was possible to stop eating expensive beef and drinking top-shelf shiraz, and downgrade to the cheap stuff, immediately you get a home loan.
Or words to that effect.
Meanwhile, Reserve Bank Governor Philip Lowe has even been saying banks have become excessively risk averse.
“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” Governor Lowe said.
“On a portfolio basis, we want the banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad, it means it’s not extending enough credit.”
As part of the government’s new proposals, and presumably retribution for the very public failure, ASIC is going to be removed from home loans regulation. This gives oversight exclusively to the Australian Prudential Regulation Authority and an overhauled National Consumer Credit Protection Act, and the Australian Financial Complaints Authority as the body for consumers to be heard.
What will it mean for you?
The clear message now, as laid out by Treasurer Frydenberg, is that there needs to be faster, easier loans... to stimulate spending and help lift us out of the COVID economy.
“So what we are seeking to do here is to boost Australia’s economic recovery by reducing unnecessary red tape, by encouraging and facilitating lending as appropriate but of course with the necessary consumer protections in place,” Treasurer Frydenberg said in a press conference this week.
“Regulations, which started as principles-based, have become overly proscriptive, costly and complex; it’s leading to delays in loans being made available, it’s leading to loans not being available as they otherwise should, as the risk aversion on the part of the banks cuts in.”
So from March 1 next year, when the changes are schedule to start, you will be much more likely to get approval for the loan you want.
You might even be more likely to be approved for it now, as the new lenient-on-lenders ethos has been made abundantly clear.
Of course, industries such as the motor industry and the housing industry have strongly welcomed the proposals.
Why I hate these changes
In fact, none of this is new at all. As I said earlier, it undoes hard-fought progress.
It also neutralises much of the damning report by the Royal Commission into Banking.
Indeed, one of the proposed changes is to remove the responsible lending obligations on mortgage brokers, leaving the new ‘best interest duty’ only.
A statement by the Consumer Acton Legal Centre called the moves a “devastating rollback of responsible lending obligations for banks and other lenders”.
It all puts the onus right back on you to be safe and sensible with how much you borrow, no matter how much you want a particular couch… or house.
Whatever terms or how much money a bank will soon give you, it is vital to make sure you save as big a deposit as you can and stress test what you borrow to ensure the repayments don’t consume more than one-third of your household’s income.
Any more than that is considered mortgage stress. And think about what would happen, if you commit to the hilt and you were to lose income or a job.
This might seem like welcome news for borrowers, but they have been thrown under the COVID-recovery bus.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
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