Banks to ease back on spending scrutiny for mortgages
Unless you've been living under a rock for the past few months (and given recent world events, we don't blame you if you have been!), you probably caught wind of the most recent restrictions regarding mortgages. You may have even been affected yourself.
In a nutshell, legislation passed in December added new safeguards to protect borrowers from unscrupulous lenders. Unfortunately, this also may have had the unintended consequence of blocking credit-worthy borrowers from getting mortgages.
As a result of the way banks implemented the legislation, media reports were widespread of mortgage applicants getting declined due to seemingly silly reasons like drinking too much coffee or having one too many Spotify subscriptions in the household.
It's worth noting that Resimac went in a different direction to the traditional banks. Instead of applying the same one-size-fits-all approach to borrowers, we continued doing what we have always done, which is assess each applicant based on their individual merits. Essentially, this meant that we didn't scrutinise the everyday lifestyle expenses of credit-worthy borrowers.
Nevertheless, Resimac was an outlier in an industry that was clamping down on credit availability whilst remaining pragmatic in assessing loan affordability and suitability. Thankfully, the government has since intervened. Last month, it released some proposed amendments to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) in an attempt to course correct from what is has recognised as 'unintended consequences' of the recent changes. These amendments are as follows:
- Remove regular 'savings' and 'investments' as examples of outgoings that lenders need to inquire into when assessing the borrower's future expenses.
- Clarify when borrowers provide a detailed breakdown of their future living expenses, there is no need to also inquire into their current living expenses from recent bank transactions.
- Clarify where lenders choose to estimate future expenses from recent bank transaction records, they are permitted to obtain information about how the borrower's current expenses are likely to change once the contract is entered into.
- Clarify the requirement to obtain information in 'sufficient detail' only relates to information provided by borrowers directly rather than relating to information from bank transaction records.
- Provide further guidance on when a lender needs to allow for a 'reasonable surplus' and how lenders should set surplus requirements.
- Provide alternative guidance and examples for when it is 'obvious' that a loan is affordable, so that a full income and expense assessment is not required.
The government will be releasing a paper with these proposed amendments for public consultation this month, with the expectation that the changes will come into effect by early June. Resimac is supportive of the upcoming amendments and is looking forward to the industry getting back to supporting property buyers, sellers and the overall economy.
This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.