The National Credit Code will have a particular impact on lenders who make loans to individuals to purchase or refinance investment residential property, a leading lawyer has warned.
Gandens Lawyers' senior banking and finance partner Jon Denovan said a common type of loan provided is a three-year interest only loan, with a common condition that if the loan was repaid early, the borrower must pay interest to the date of repayment, plus three months additional interest. "The three months additional interest was an important revenue source, as it covered the lender's loss of opportunity while it found a new investment for its money," Denovan said.
However, the National Credit Code prevents lenders charging interest other than on daily rests. In addition, the NCCP Act provides that a borrower is entitled to repay a loan at any time upon payment of interest charges and other fees and charges up to the date of repayment. "However, the provision also allows lenders to charge early termination charges if provided for in the contract," Denovan said.
Restrictions in the NCC on early termination fees will also present challenges, according to Denovan. "In the past, opportunity costs have not been a material concern as most retail lenders had a large pool of loans, and so re-lending was not a significant challenge," he said. "On the other hand, smaller lenders, especially specialist residential investment lenders, may face delays of six months or more before they can re-lend, and the return while money is on standby may be small," he added.
Meanwhile, requirements for lenders to follow procedures to determine if a loan is 'not unsuitable' for a borrower will present difficulties due to differences between investment and owner-occupier loans. "Generally, an owner-occupier needs to be able to demonstrate a medium to long term ability to service the loan repayments. On the other hand, an investor may have specific investment strategies that make it reasonable to accept pre-paid interest, interest capitalisation and special exit strategies," Denovan said.
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