The Finance Services Royal Commission has exposed some astounding revelations regarding irresponsible lending practices and it is going to have serious disruptions for future lending.
As mortgage brokers, we are already seeing stringent changes being handed down from the banks, who are now requiring our clients to pick apart their living expenses to meet serviceability requirements. What was once deemed as adequate information to submit with a home loan application will no longer pass. The banks have imposed tighter risk identification protocols for assessing living expenses, which is exposing how much money you declare you spend versus how much you actually spend. On top of this, accumulated credit card debt, personal loans, yearly holidays and other liabilities will now play more heavily on your lending capacity. As banks start to use more realistic assumptions about how much people can borrow, it is likely the size of loans available will decrease.
ANZ chief executive officer Shayne Elliott told The Australian Financial Review that, “People are still going to buy a home, so it doesn’t change fundamental demand, but it will change the process and will probably make it harder for people to be successful in their applications.”
Depending on how you are financially positioned, there is good news and not-so-good news here. The good news is that if you already own your own home, these changes shouldn’t really impact you. Those who will likely see the most benefit of the Financial Services Royal Commission will be cashed-up buyers with little-to-no concerns regarding borrowing capacity and serviceability. They are in a strong position to negotiate, upgrade or buy either a primary place of residence or an investment property.
The not-so-good news is that these changes will have an impact on you should you choose to sell or refinance your property. Refinancing will be heavily scrutinised and this could result in difficulties securing finance or even a decline of loan applications, so the overall ability of buyers to build equity or a portfolio could be limited.
In relation to buying and selling, it is predicted that one of the major fallouts of the Royal Commission will be that housing prices may drop – while this sounds positive, it isn’t necessarily the case. The fact of the matter is that the Australian economy depends on house prices. Across the country, the banks are writing $21 billion in loans per month and have been driving our economy forward. The growth in loans has fuelled the growth in house prices. With a tightening of lending criteria and more people being unable to meet serviceability requirements, house prices will fall and in turn, lower housing valuations. This means that people won’t be able to make the money back that they paid which will increase debt, lower spending and heavily impact the economy.
The Financial Services Royal Commission is due to submit an interim report no later than 30 September 2018, and will provide a final report by 1 February 2019.