How the new banking legislation will affect you
The Morrison Government will begin putting recommendations from Financial Services Royal Commission into law, so what does this mean for you?
When the Royal Commission’s findings were first released, the impact on property was limited to lending practices for home loans and changing the way mortgage brokers would be paid.
Treasurer, Josh Frydenberg recently announced the Government’s timeline for introducing a range of bills to parliament to cover off those recommendations.
The proposed new laws will change many things in the banking and finance sectors, but interestingly these will have even less impact on property than we first thought.
Why it’s business as usual for mortgage brokers
One of the original recommendations from the Royal Commission was that mortgage brokers be banned from accepting trailing commissions.
This would have restricted brokers from accepting money from lenders to promote their loan products to clients. Instead, this fee would need to be paid upfront by those looking for a loan.
But instead of banning these kinds of commission payments, the recommendations advise that in three year’s time the commissions will be reviewed.
Most Australians who engage a mortgage broker are young, and they find the process of getting a loan both stressful and complicated. For these lenders, mortgage brokers provide a valuable service.
These potential borrowers need the educational information and personalised advice that brokers offer and they know that brokers get paid commissions but they don’t seem to care.
Another recommendation was that brokers must act in the best interest of borrowers and I don’t think there’s anyone in the mortgage broking business who would disagree with that – it’s the core of their business model.
If there is a decline in mortgage brokers it means there will be less competition in the home loan market, which will benefit the big four banks at the expense of home owners.
Responsible lending won’t change but that’s good
Just before the Royal Commission began, major lenders changed how they assessed potential borrowers and their capacity to repay loans.
Part of this was driven by changes from the Australian Prudential Regulation Authority (APRA), which made it much tougher for borrowers to get a loan based on how banks calculated a borrower’s ability to service or repay that debt.
APRA had insisted that lenders apply an interest rate of 7% to loan applicants to then assess their application, which left many borrowers with far less to spend.
Yet, we’ve seen that APRA has now relaxed that calculation, meaning borrowers can again take on bigger mortgages.
But what hasn’t changed is the other calculation that banks have been using on home loan applicants. So rather than applying a low standard of living expenses to all applicants, lenders are now looking very closely at an individual’s real spending habits.
Given that most people now use electronic payments for both everyday purchases such as eating out or take away coffees, plus major costs such as housing and healthcare – banks will keep closely scrutinising the real spending habits of potential lenders.
This is no bad thing.
You only have to look at the last big financial crisis to see what could happen. The Global Financial Crisis was driven, in part, by banks lending large sums to people who had no chance of paying back those loans.
On the one hand we don’t want banks being so hard on lenders’ spending habits that ordinary people who can afford a home loan can’t take one out; yet at the same time, we don’t want lenders borrowing large sums to people who they know won’t be able to repay that debt.