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What the Responsible Lending Law changes mean to you

You might have recently heard in the media that ‘Responsible Lending Laws’ are set to be scrapped early next year.  We wanted to wait until we had more clarity about what the changes were and how they would impact on you before publishing, so here’s our overview…

What is currently in place and why?

The responsible lending laws were put in place by former Prime Minister Kevin Rudd in 2009 after the GFC, when banks were accepting only basic evidence that borrowers could afford to repay their home loans.

In the years since, it has become increasingly more difficult to access credit, particularly after the Banking Royal Commission in 2018.

Since then, anyone applying for a home loan has had their spending habits put under the microscope, with banks requiring brokers to audit all borrowers’ income sources and expenses against their bank statements and verify any inconsistencies.  As you can appreciate, this has been arduous and invasive, for both us as brokers and you our clients.

The Changes

To help boost economic recovery in light of the Covid-19 led recession, the Federal Government has decided to change the Responsible Lending Laws.

In late September, the Treasurer Josh Frydenberg admitted “And right now we have a regulatory approach that’s too complex, that is too costly, that is overly prescriptive, that’s a one-size fits all model.”

“So, what we’re seeking to do is to remove that duplication to streamline that process, and to enable the lending to take place without borrowers having to provide their Uber Eats slips and their Netflix subscriptions.”

Is this good or bad?

There are two schools of thought in terms of the proposed changes scheduled for 1 March 2021.  Some experts argue that it will free up access to credit and make getting a loan a whole lot easier.

Others think that could lead to a “credit binge” and could reverse some of the good work done by the Banking Royal Commission, which exposed some the banks for taking advantage of vulnerable Australians.

What does this mean for YOU?

No matter which view you side with, there are some important things you need to know.

  • The proposed changes will loosen credit policy however the onus will shift to you as the borrower that you understand what you are applying for.
  • You will need to have a really solid understanding of your own finances, your income  and expenses, how you spend your money, and what expenses you are willing to forego to ensure you are able to pay your loan repayments now, and into the future.

This is where we step in!  We have the resources to quickly and effectively assess your income and expenditure habits to help you understand more accurately the affordability of the home loan amount you are contemplating.

The new changes will not impact on our ‘best interest duty’ obligations to you as our clients as we will continue to ensure our recommendations are always in your best interests. We will explain the options available to you, as well as the merits and risks of each offering. We can also provide you with an App that will give you access to, and reports on your income and expenditure management 24/7. This is a powerful tool that will help keep you on track and avoid making costly decisions.

If you know someone who is considering going straight to a bank rather than coming to us, please let them know the pitfalls.  They will need to have a really solid understanding of:

  • their own finances,
  • their expenses,
  • how they spend their money, and
  • what expenses they are willing to forego to ensure they are able to pay their loan repayments both now and in the future.

Over the next few months, as the changes come into effect, we are here to help.

You will always get the best of both worlds: responsible borrowing and easier access to credit.

If you would like to chat about a home loan, please feel free to call us on 8004 2222 or book a time to chat with George.

 

PS  This article is prepared based on general information. It does not take into account individual financial or property objectives or needs and is not financial product or investment advice.

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