Responsible lending rules are on the cutting board this federal budget

Responsible lending rules are on the cutting board this federal budget

The responsible lending obligations that place the burden on banks to make sure a person can afford to repay the debt they’re being sold could be scrapped in the upcoming federal budget, Treasurer Josh Frydenberg has said.

The move is designed to make credit available to more people quicker as the country climbs out of its first recession in almost three decades, Mr Frydenberg said, in an opinion piece published in The Australian.

“Lenders have become increasingly risk averse and overly conservative. As a consequence, borrowers, irrespective of their financial circumstances, have faced an ever more intrusive, difficult and drawn-out approval process,” he said.

“The removal of responsible lending obligations (RLO) substantially will cut red tape and improve consumer outcomes.

“It will restore balance to the system after 10 years of regulatory creep that has seen the pendulum swing too far away from borrower beware to lender beware.”

Getting credit? Here’s what it could mean

Responsible lending obligations were introduced after the Global Financial Crisis (GFC). They prohibit financial institutions from selling, suggesting or helping a borrower sign a credit contract if the product is “unsuitable” for them, according to the Australian Securities and Investment Commission (ASIC).

They place the obligation on banks to inquire, verify and assess a customer’s financial situation before granting them a credit card, a personal loan or a mortgage, among other kinds of credit.

The Reserve Bank’s view on responsible lending obligations

Mr Frydenberg paraphrased select testimony from Reserve Bank of Australia (RBA) Governor Philip Lowe in his thinking behind eliminating responsible lending laws.

“I think the principles in the legislation are sound, but I think the way we've translated those principles into reality needs looking at again,” Dr Lowe said, before a standing economics committee in the house of representatives last month.

“... We can't have a world in which, if a borrower can't repay the loan, it's always the bank's fault. 

“On a portfolio basis, we want 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.”

He added fewer banks had expressed concerns “in the past three or four months” following new guidance introduced by ASIC. 

“Institutions are gradually coming to grips with those,” he said.

Four consumer groups denounce the plan

Consumer groups were quick to denounce the indication responsible lending obligations could be scrapped in the coming federal budget, due October 6.

The Consumer Action Law Centre, Financial Counselling Australia, Financial Rights Legal and Choice released a joint statement asserting borrowers need more income, not more debt.

“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term,” Karen Cox said, chief executive of Financial Rights Legal Centre, and an opening witness to the recent banking royal commission.

“Our service helped thousands of Australians drowning in debt and we continue to see legacy debt that predates the Hayne Royal Commission. How can we have so quickly forgotten the hard lessons from the GFC and the Hayne Royal commission?”

Businesses generally praised the move

Others welcomed the news, including property developers and investors, claiming the elimination of RLO will give the economy a much needed jump start at a time when it needs it.

“The measures announced by the Treasurer today appear focused on getting the balance right between a fit-for-purpose framework, which supports the flow of credit with regulatory oversight and consumer protections in place,” Ken Morrison said, chief executive of the Property Council of Australia. 

“A competitive and well-functioning credit market, subject to prudent regulatory oversight, will help more Australians buy or invest in property, improving housing supply and affordability and support jobs and economic growth.”

Only responsible lending practices will be scrapped, Treasurer Frydenberg said, and not other regulatory checks and balances introduced after the GFC.

Other financial reforms will stay in place

 “Importantly, the many additional protections the Coalition has introduced will remain in place, including the best interest duty for mortgage brokers, ASIC’s product intervention power, design and distribution obligations on lenders, and the continued free access to consumers to dispute resolution via the Australian Financial Complaints Authority,” he said.

“As the economy emerges from the COVID-induced recession, we know credit will be essential to the speed and strength of recovery. 

“These reforms are in pursuit of that objective.”

Did you find this helpful? Why not share this news?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.