There are big changes coming to home loans.
There are big changes coming to home loans.

First home buyers win in credit shake up

The days of being asked by the big banks about every dollar o

f your expenditure from Uber Eats to Netflix to secure a loan to buy a home or a small business could soon be over.
In the biggest shake up of credit laws in decades, the Morrison Government is set to encourage faster, easier loans to get the economy moving and help first home buyers get onto the property ladder.


For those wondering whether it's wise for Australia to adopt a "let it rip" approach to credit during a recession when our personal debt is among the highest in the world, it looks like we're about to find out.

 

 


In the wake of the 2007's global financial crisis and the Royal Commission into the Banking sector, Treasurer Josh Frydenberg will argue banks have become too risk averse on lending.
"As Australia continues to recover from the COVID-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses," Mr Frydenberg said.

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The Morrison government is encouraging faster and easier home loans.
The Morrison government is encouraging faster and easier home loans.

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"By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal."


Writing in The Australian, Mr Frydenberg said the banks' obsession with running a ruler over the minutiae of borrowers' expenditure had gone too far.


"It is now not uncommon for a person applying for a mortgage to be asked to explain individual discretionary spending and provide verification of a customer's Netflix and Spotify subscriptions, UberEats or MenuLog usage or other detailed information," he said.


"All in order for the lender to be confident that it cannot be held liable in the event the borrower cannot repay the loan."


Mr Frydenberg will argue the changes will shift the balance of responsibility from ­"lender beware" to "borrower ­responsibility" to be honest about your capacity to service a loan.


The shake up follows a warning from the Reserve Bank Governor Phil Lowe that policymakers needed to accept that some loans will go bad without blaming it all on the big banks.

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Treasurer Josh Frydenberg. Picture: NCA NewsWire / Gary Ramage
Treasurer Josh Frydenberg. Picture: NCA NewsWire / Gary Ramage


"We can't have a world in which, if a borrower can't repay the loan, it's always the bank's fault," he said.
"On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it's not extending enough credit.


"The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn't understand the customer; if it had done proper due diligence - this is the mindset of some - the bank would never have made the loan. So some of the banks have had this mindset, 'Well, we can't make loans that go bad."

In a range of examples designed to show the problems in the current system, the Treasurer provided the example of 'Lisa' a retiree who recently lost her husband.


Despite holding a $3,000 credit card account in both their names, the bank closed the account upon her husband's death as he was the main cardholder and refused to provide her with a card in her own name despite the fact she had $430,000 in her accounts on the basis that her monthly income wasn't enough to cover it.


In another example of risk adverse lending, a borrower 'Marc' put down a deposit to buy his first home after receiving pre-approval from the bank.

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Assistant treasurer Michael Sukkar. Picture: Mike Bowers.
Assistant treasurer Michael Sukkar. Picture: Mike Bowers.

Prior to settlement, he received a promotion at work that changed his role and increased his salary. After informing his lender, the bank's response was that the promotion constituted a change in circumstance, and therefore the loan suitability process would need to be run again to determine how much he could borrow.


This process was then delayed because Marc could not provide pay slips to "prove" his income at the level to rely on.
Assistant Treasurer Michael Sukkar said ensuring easier access to credit would help small businesses recover from the pandemic.


"Now more than ever, it is critical that unnecessary red tape and costs are removed so that Australians can continue to spend or purchase a new home and businesses can invest in creating jobs," he said.


"These reforms strike the right balance between protecting consumers while maintaining a viable sector to provide these products, and build upon the successful implementation of ASIC's product intervention powers which protect consumers from predatory lending behaviour."

Originally published as First home buyers win in credit shake up


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