Bank lending rule changes bring challenges and safety
Over the past couple of years, Australian banks and financial institutions have been tightening lending rules. For better or for worse? You decide.
Back in March 2017, the Australian Prudential Regulation Authority (APRA, the statutory authority that supervises most banking and financial institutions) began placing restrictions on how banks can lend to consumers.
A lot of these changes started off small (restrictions in investor lending and interest only loans, for example), but they’ve slowly crept up.
Here are some of the major changes now in place:
|Living expenses||Based on a vague estimate of client's costs. Limited verification. Banks would use a minimum benchmark known as Household Expenditure Measure (HEM).||Banks are now transitioning toward analysing 6 months of bank statements and scrutinising expenditure. This is used to calculate the true monthly living costs.|
|Other mortgages||Many lenders would service other mortgage debts at the actual repayment rates.||Other mortgages are now expensed by a bank calculator based on actual repayments plus a safety margin of 2-3%. If the loan is interest only, it's based on principle and interest repayments.|
|Credit card balances||Many lenders would assess credit card repayments at 2.5% of the total limit, regardless of the balance.||This is now based on 3% of the total limit by almost every lender.
|Exit strategy||Never asked for clients under 55 years of age.||If the client intends to retire (and the question ‘when do you intend to retire?’ is now asked) or will turn 70 during the loan term, the bank will ask for a strategy to clear the debt.|
|Credit reporting||Banks had access to all credit inquiries for the past 5 years, but no way of knowing whether loans had been taken out or just applied for; no way of confirming balances and no way of knowing about debts that applied more than 5 years earlier unless it was from a related financial institution they owned.||Banks now have comprehensive credit reporting and, while some smaller lenders have been slow to act, eventually every finance contract (car loan, personal loan, credit card etc.) will display information such as credit limit, monthly payments, balance, and if you pay the account on time (or in full) each month.|
So what does this mean for you?
In a lot of ways lending appears harder—more challenging—but that’s simply because banks are now asking questions they should have been asking. Managing cash and making sure funds regularly sit in accounts to cover repayments will be essential to be in good standing with financial institutions.
There’s a safety factor here for the banks because they want to make sure they get their money back. And, if you get the loan, you’ve had an in-depth, independent assessment that says you have the ability to pay your debts.
The good news is this:
If you pay your bills on time and keep spending below benchmarks you’ll be more sought after by lenders. This will result in you being offered a more attractive interest rate. However, the reverse is true for those who habitually pay late.
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