Banks and lenders have been instructed to grill borrowers over their spending and what they're willing to give up if they want a home loan, under new lending guidelines released by ASIC.
Want a home loan? Sorry, but you might have to give up your nightly Netflix binges and send your kids to public schools.
After a lengthy review, the Australian Securities and Investments Commission (ASIC) on Monday released a 96-page document with updated responsible lending guidelines which are designed to stop consumers from taking on 'unsuitable' debts.
ASIC Commissioner Sean Hughes said the updated guidelines have been aimed at clarifying the obligations of lenders following the financial services royal commission.
"ASIC conducted extensive consultation on this important issue. The public hearings and submissions highlighted the areas where industry sought clarification from ASIC. We have listened carefully to all stakeholders and addressed areas where we consider updated guidance would help," Mr Hughes said.
The regulator has included 39 examples to accommodate different types of employment and expenses.
In one of the examples provided by the regulator, a lender decides that prospective borrower 'Sarah' can only afford a home loan under the loan term she has requested if she moves her children to a public school.
Sarah decides it's not a lifestyle change she's prepared to make, so the lender asks if Sarah would be happy for her loan term to be extended. Sarah agrees that her loan term could be increased, even though it means paying more in interest over the life of the loan, in order to keep her kids in a private school.
In other words, borrowers could take out longer and more expensive loans if they're not willing to forego certain things.
In other instances, borrowers will have to work out what they are willing to give up if it means being approved for a loan. In another example, 'Leah' applies for a $720 loan to pay for her car rego. After the lender reviews her bank statements, they see that she regularly spends her full income every pay cycle. Leah agrees to cancel her monthly streaming services in order to service the loan.
"After discussing with Leah concerns over her ability to finance the small amount credit contract, Leah told the lender that she could cancel her monthly streaming services, which would cover the monthly repayment amount on the proposed loan.
"The lender requested an email from the subscription service confirming cancellation of the account and as Leah's account statements showed no evidence of Leah overdrawing her account or default fees, continued to approve the credit application and offer Leah the loan."
The table below displays a selection of variable-rate home loans on offer, featuring a low-rate pick from each of the following three categories: the big four banks, the top 10 customer-owned banks, and the larger non-banks.
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 April 2020. View disclaimer.
Lenders asked not to rely on HEM
The corporate regulator is also asking banks and lenders to go beyond the basic spending benchmark otherwise known as the Household Expenditure Measure (HEM) because it's not always the best way to assess the reliability of a borrower's expenses.
ASIC said the HEM benchmark doesn't include spending on a range of necessities like housing costs, superannuation, HECS debts, lease payments, school fees, medical bills, child support and alimony, interest repayments on loans and life insurance.
"The HEM figures do not include spending on a range of items that are commonly part of a consumer's overall outgoings," ASIC said.
"When you compare the consumer's estimates to HEM it is important that you only use the estimates of spending on the kind of items that are included in the benchmark figure, and not a wider estimate of their total expenditure (otherwise the comparison is unlikely to give you useful information about whether the estimate of the consumer's 'basic' expenditure is realistic."
Earlier this year, ASIC took Westpac to court over the bank's reliance on the HEM method, arguing it was a breach of responsible lending.
Federal Court judge Justice Nye Perram dismissed the case, suggesting consumers could cut back on luxuries when pressed to meet their loan repayments.
"I may eat wagyu beef every day washed down with the finest shiraz, but if I really want my new home, I can make do on much more modest fare," Justice Nye said.
The ASIC document refers to Justice Nye's judgement several times, saying that even though borrowers can cut back on their spending to make their loan repayments, there are many important costs such as dependants to support or housing costs that people have to make, and that it would be unrealistic for banks to assume people can cut these out.
"We recognise it may not be possible to identify with certainty the extent to which current expenditure on items of this kind are essential or if the consumer would be able to make some reductions if needed. You are likely to need additional information to determine whether the consumer has higher levels of essential spending, which cannot be reduced or eliminated, because of their particular circumstances," ASIC said.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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