On Friday, the Federal Government announced the biggest change to lending standards we’ve seen since the GFC and it could make finance a lot easier to obtain for property investors.
Treasurer Josh Frydenberg is poised to put the responsibility back on the borrower and away from the lender in a move that aims to help bolster the economy. Since the GFC, criteria around accessing credit has become overly tight and burdensome and the Government believes it is now slowing down growth. With the impacts of COVID impacting many areas of the economy, a key to the recovery will be the ability to borrow not just for property but also for businesses.
The moves are poised to make it easier for investors, home buyers and businesses to get finance with the burden moving away from the banks and back onto the borrower.
For many years now, it has been the responsibility of the bank to ensure a borrower can comfortably afford the repayments on a loan. The Government is proposing new laws that will take away some of the requirements around verification for loans which have become problematic in recent years.
In effect, the Government is moving away from what’s been known as responsible lending standards to what we might consider a far more sensible lending policy – with the burden on the borrower.
The new laws, which will come into effect in March if they pass both houses of Parliament, will transform the lending environment into one that is effective ‘buyer beware’. A move that we’ve likely needed for some time.
Even the RBA has come out strongly in support of the changes with Governor Phillip Lowe suggesting that banks need more flexibility around their lending practices.
“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,” he said.
“So some of the banks have had this mindset, ‘Well we can’t make loans that go bad.'”
The current laws make the banks responsible for the intentions and capacity of the borrowers. This leads to overly complex loan assessments and as we’ve seen in the current environment, extended wait period for borrowers who are wanting to access finance and settle on properties. This is due to the fact that the lender is on the hook if a borrower can’t meet their repayments and is potentially even liable.
Under the proposed changes, the banks would still be accountable to the regulator, however, they would conduct their own risk assessment of borrowers as normal and will have a lot more flexibility as to who will be able to borrow.
The changes also come on the back of the Hayne Royal Commission and very tight restrictions from the likes of APRA, which had put a hand brake on lending and property through 2018 and 2019. Now it appears the suggestions from the Hayne Royal Commission will never see the light of day as we head back lending policies prior to Kevin Rudd’s changes that occurred in 2009.
The move towards more flexible lending criteria, where the burden is on the borrow is a huge win for property investors. One of the biggest hurdles is always based around the ability to service a loan. Currently, banks are required to verify a borrowers income and expenses which can be highly variable. Many lenders also assess things like bonuses or even rental income at a fraction of their true value.
These limitations can make otherwise creditworthy borrowers unable to finance properties and can severely limit their ability to grow their property portfolios. The proposed changes on the surface appear to be a huge advantage for property investors, home buyers and the overall property market and a great step in the right direction at a time that it is most required.
Just like the property cycle, credit markets go through periods of easing and tightening and it appears this could be the first step in the next stage of the credit cycle in Australia, while at the same time being a boost to borrowers who are looking to grow the property portfolios.
