New lending rules explained
New lending rules explained
Real estate investment specialist Scott Kuru shares his thoughts on the potential impacts for property if 'responsible lending' regulations are scaled back.
If you want to rip into a bucket of fried chicken while bingeing on Netflix this Saturday night then … you’re in luck.
Because as bizarre as it seems, for the last 12 months, this could have cost you a home loan.
Let me take you back to the beginning so it’s clear.
Remember the royal commission into the finance sector? One of their recommendations was that banks make sure that borrowers can actually repay the loans they’re taking.
Not just look good on paper, but actually be able to pay it. And so a new regulation came out called ‘responsible lending’.
Problem was, you might look good on paper, but if you blow all your money on UberEats, streaming services and online shopping you might not have enough left over to pay your home loan.
And strangely enough, if you’re terrible with your money …
It’s not your fault you can’t pay your loan this month … it’s the bank’s fault.
Sheesshh. Talk about taking personal responsibility for yourself, right?
All of a sudden, the banks had to make 100 per cent sure you weren't leading them up the garden path.
So when you applied for a loan they would pick through your bank statements, analyse your credit card spending and probably go through your sock drawer for good measure.
There were even reports of people getting rejected because they ate too much KFC or spent their money on Netflix.
Worse still, it was taking the banks forever to process applications because they couldn’t rely on benchmarks. They had to pick through your life first, and they were rejecting people for stupid reasons.
Now though, Covid19 has created an economic crisis and the government needs money to get out there, and fast.
So they’ve back-tracked on the ‘Responsible Lending’ rule and gone back to using benchmarks like the old days.
This means credit is about to start flowing faster. And more of it too.
It’s impossible to know for sure what this is going to mean for borrowers. Potentially, it could mean up to $80,000 more for some borrowers.
We just don’t know yet.
Banking ‘guidelines’ are just that – guidelines. It’s up to the banks to decide how to implement the rules. And if the Australian Prudential Regulation Authority thinks they’re overstepping the mark, then they’ll rein them back in.
What we know for sure is it’s going to mean two things.
First, if people can borrow more, then house prices will go up. That’s because we’ll have cashed up borrowers with more buying power.
And second, we’re going to see loans get approved much, much faster and with less headaches.
This might be a disaster for genuinely responsible borrowers who have done all the right things, and suddenly face a massive price hike just as they get ready to buy.
However it’s great for investors because it means we can potentially borrow money more easily.
And we can get it faster.
But best of all, we’ll be investing in a market where consumers are being given more and more spending power.
And as an investor, I can’t think of anything better than that.