Lending Reforms May Affect Your Home Loan

The proposed lending reforms for 2021 could change the way we borrow. Here’s how it will affect home buyers.

Responsible lending laws help make sure that banks don’t let you borrow more money than you can realistically repay. They were brought in in 2009 and reinforced after the Banking Royal Commission in 2019, with tighter lending practices put in place.

In March 2021, as part of the Federal Government’s response to COVID-19, a bill to repeal part of the responsible lending laws was put forward. The changes are intended to reduce red tape and make the application process easier when accessing loans.

Here’s what home buyers need to know.

Background

In early 2019, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Inquiry (the Banking Royal Commission) wrapped up with a series of recommendations. Many of these centred around responsible lending laws.

Originally introduced in 2009, following the Global Financial Crisis, responsible lending laws set out what lenders can and can’t do. The laws require lenders to make sure that borrowers are able to repay the loans they offer. This requires them to make ‘reasonable enquiries’ into a borrower’s financial situation, and take steps to verify it.

The Banking Royal Commission recommended that no changes be made to the laws themselves, but it did cast a spotlight on the way that lenders were implementing them.

After the Banking Royal Commission, many lenders tightened up their practices in a number of ways:

• Instead of relying on a standardised measure for household expenses (the HEM), they now look at each borrower’s actual expenditure using bank statements.
• Instead of assuming that borrowers would tighten up their budgets and reduce spending if granted a home loan, lenders take current expenditure as their guide.
• Lenders need proof from borrowers that their expenditure, income and debts are accurately reported.
• Moving away from case-by-case analysis and towards a one-size-fits-all approach to lending.

2021 responsible lending reform

The proposed reforms would remove responsible lending requirements from all loans except high-risk products (which are short term personal loans and consumer leases like car loans). They would see a move away from a ‘lender responsibility principle’ and towards a ‘borrower responsibility principle’.

In theory, lenders would no longer need to investigate borrowers’ financial situation. The ‘borrower responsibility principle’ means that the responsibility lies with the borrower to be truthful.

In practice, it’s likely that lenders will still make the necessary enquiries to see if you can afford your loan. The changes don’t excuse lenders from their lending obligations under the Australian Prudential Regulation Authority (APRA), for example. APRA’s standards govern over 90% of all credit extended to Australian borrowers and apply to all Authorised Deposit-taking Institutions (ADIs), which includes banks and home loan providers.

The changes also mean that lenders will feel less tied to a risk-averse ‘one-size-fits-all’ approach and can use discretion when approving loans.

What can borrowers expect? 

It’s worth noting that as at time of publication, the proposed reforms aren’t yet law. The new bill has struggled to garner cross-bench support in the Senate and is currently on pause. However, there is a very good chance they’ll be passed in the near future, so it’s a good idea to be prepared.

Either way, you should still expect to provide information to the lender to show that you can afford your loan.

The main difference will be that the lender can rely on the accuracy of that information without double-checking it in detail. They won’t be held responsible if it isn’t correct.

This gives borrowers some discretion; and, arguably, more autonomy. Here are two common examples:

1. You’re renting a place with a small kitchen and an old, unreliable stove. As a result, you spend a lot of money on takeaway. However, you are planning to build a new house with a nice kitchen and be able to cook your own meals again. When you list your expenditure, you leave out the ‘eating out’ expense because it will go away once you have the home loan. 
2. You’re living with your parents to save money for your house deposit. It’s a long train ride to your workplace, and when you’re rostered on a late shift you often catch an Uber, which is faster and safer. Your new home will be much closer to work, so you won’t have that expense.

Under the stricter rules, lenders must look at your bank statements and calculate your current expenditure as if it will be the same in the future. Both of these examples could reduce how much the bank thinks you can afford.

For borrowers in unconventional employment, or whose situation is otherwise unusual, the ability of lenders to use discretion may also be helpful. Banks can make decisions within their risk appetite and using their understanding of your unique circumstances.

The loan application process may become faster and more efficient if lenders don’t have to go through bank statements line by line.

The responsible lending changes may also promote competition and therefore competitive rates. If the application process for a new home loan or refinance is faster and easier, borrowers are more likely to explore their options and take advantage of new deals.