Credit is often called the lifeblood of the economy, and it’s an essential part of our post-COVID recovery.
That’s why we’re keeping a keen eye on the Federal Parliament’s debate on proposed changes to responsible lending laws.
The best part for investors? If the changes go through, loan approvals for property investors should become far more streamlined -- reducing the challenges many investors have faced in recent years around financing for property acquisitions.
The upshot for borrowers and property investors
These proposed new rules represent great news for borrowers, including investors.
Anything that streamlines the loan approval process will be welcomed with open arms.
For example, reducing the sheer amount of detail consumers must supply about their living expenses, which got a bit overzealous in recent years. Responsible accounting is one thing, but having to detail every impromptu midweek dinner out seems like overkill!
Who will be the big winners if the changes are enacted?
First homebuyers and self-employed borrowers.
“Some first-time buyers are currently being denied loans, because lenders must assume all their discretionary spending will continue if they get a mortgage,” says OpenFinance senior mortgage broker, Amanda Gleig.
“However, a typical first homebuyer would cut this non-essential consumption to meet their mortgage repayments – which lenders will be able to recognise under the new system,” she says.
“At the same time, some self-employed borrowers are currently being rejected because lenders are ‘double-dipping’ with expenses. Business owners often pay their phone, internet and transport bills through their business – and lenders are not only counting these as business expenses, but also assuming the borrower is still racking up similar bills in their personal name.”
The new system will allow lenders to take a more reasonable approach in such situations, when assessing loan applications.
Another welcome improvement?
Speeding up the loan approvals process.
Our OpenFinance brokers say the ‘big four’ banks currently take 15 to 30 business days on average for assessment of your credentials. That’s business days. Six weeks!
It’s easy to see how streamlined approvals could benefit investors with finding and securing new opportunities -- especially in a hot property market, where timing is everything.
What’s driving these proposed lending changes?
Let’s go right to the source, and highlight a few essential pieces of the Government’s own literature on the proposals (we’ve added our own emphasis in bold, for further clarity).
“Fast-forward to 2020, and the principles which underpin responsible lending obligations (RLOs) have been implemented in a way that is no longer fit for purpose and which risks slowing our economic recovery. The prescriptive approach in RLO guidance and internal lenders’ systems developed to comply with the guidance leaves borrowers and lenders facing a ‘one-size-fits-all’ approach.
“This means lenders are required to adopt a similar approach to credit assessment for most consumers and credit products, irrespective of their circumstances. Lenders face prescriptive obligations, with close to 100 pages of guidance advising how they should meet their obligations under RLOs.
“As a result, obtaining credit has become more burdensome for borrowers, irrespective of the risks they face, and significantly increased the time needed to gain credit approvals.
“The changes will remove the ‘one-size-fits-all’ approach to lending and ensure credit assessment is attuned to the needs of the borrower and the credit product. For example, lenders at present are required to obtain and verify extensive information about borrowers’ expenses, irrespective of the type of loan product or the borrower.
“Following the changes, the obligations on the lender will be proportionate with the risk. As a result, credit providers will be able to simplify their credit assessment process and extend credit in a more timely and efficient manner.”
Why change the lending laws now?
To understand the intent of the current laws, we need to recall the Global Financial Crisis of 2007-2008, which exposed some sketchy ways of doing business, and the lack of safeguards for many consumers.
The National Consumer Credit Protection Act 2009 was approved to stop banks giving unsuitable loans to customers, and went into effect in April 2010.
But in September 2020, with the country in the grip of a pandemic and the economy stagnating, the government decided it was time to overhaul the nation’s lending rules.
Specifically, the government would remove the responsible lending obligations (RLOs) from the Credit Protection Act (except for small amount credit contracts and consumer leases), stating that the reforms would “make it easier for the majority of Australians and small businesses to access credit, reduce red tape, improve competition.”
It’s more than a mere coincidence this announcement came at a time when the housing market was at a COVID-induced standstill – a situation that has since improved dramatically.
In short, the commendable aims of the Credit Protection Act have now become an unwieldy tool that can hinder borrowing and the economic stimulus that generates. (We also can’t forget about the massive network of industries linked to property, from solicitors to tradies to whitegoods retailers and removalists, and many more).
Are there any downsides to the proposed lending changes?
It’s a fair question to ask: aren’t those lending safeguards there for a reason?
We acknowledge that the new lending proposals are opposed by the Opposition, and several consumer groups have voiced concerns that winding them back could remove necessary safeguards.
There seems to be a common belief out there that banks will just throw money at anyone, especially when the property market's moving. That’s far from the case. There will still be plenty of checks and balances to ensure that borrowers are not unreasonably burdened by credit they can’t service.
In supporting the proposed changes, the Australian Banking Association (ABA) stated (emphasis added):
'This reform means less time and paperwork for borrowers, not less scrutiny for lenders. It means less reliance on obscure discretionary spending during the loan assessment and more attention on the factors that count, like income expenses and debt. Banks knowfrom decades of experience that Australians are reliable and responsible borrowers. They adjust their lifestyle to repay their loans, and when things go wrong it is rarely, if ever, due to spending habits but more to major life events that impact income, such as job loss, illness or divorce. That's why this change makes sense'.
We’re confident that relaxing the RLOs won’t create a ‘Wild West’ property market. Our regulatory framework is robust enough to avoid a US-style subprime-type situation, when easy mortgages were being scattered like confetti.
What can property investors expect, and when?
So, let’s recap the likely impact these changes will have on the Australian property market generally -- and on investors specifically, including OpenCorp clients.
The Senate Economics Legislation Committee has backed the proposals, and they have been debated recently in Parliament. Approval could basically come at any time.
Right now, we’re in a low interest rate environment -- finance from the major banks and other reputable lenders has never been cheaper. We know this won’t last forever, but it’s widely expected to stay that way for a few more years yet.
If the new lending rules pass, as expected, the whole process will become streamlined, allowing lenders to approve more loans, potentially at higher levels than previously.
We’d expect this in turn to encourage prospective property purchasers, including investors, to apply for a loan and jump back into the market. We’d then likely see further increased demand for property -- but as we know, there’s currently a lack of supply, which is forcing up prices in many cities and regional centres.
We see this emerging situation as an amazing opportunity for property investors.
That said, to take full advantage of this economic situation, you need to be prepared, have a clear sense of your situation, and a solid strategy, so you can be ready to take action.
Our team is here to help you understand the best approach and the right opportunities for you and your family, which is why we offer personalised Investment Strategy Sessions with our analysts, absolutely free and no-obligation.
Don’t miss your chance -- book in your free Strategy Session call with our team today!
Michael Beresford is an experienced property investment advisor and Director of Investment Services at OpenCorp, Australia’s leading property investment specialists. His track record includes helping 1000+ OpenCorp clients add close to $600m in value to their portfolios.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.