Major changes to obtaining a loan are being put into place after the Royal Commission into Banking revealed rorting and conflict of interest in the operation of some banks and financial advisors.
Stricter guidelines are already being adopted across the banking industry and the impact is already evident with a squeeze on credit and downward pressure on property values.
Here are the top-line changes that affect first home buyers and those seeking new loans:
Your expenses will be put under greater scrutiny
Banks are dropping the so-called Household Expenditure Measure, which has been a catch-all assessment of an applicant’s ability to afford a loan. It is seen as favourably assessing their actual monthly expenses. The consequence has often been to offer unaffordable loans with devastating impact on those who end up losing their homes. That is all changing. Expect individual inspection of your household expenses right down to a weekly basis. Expect to be queried on your discretionary expenses.
Lower loan thresholds
By applying greater due diligence to expenses, banks are offering loans for lower amounts than previously and rejecting more applications entirely. This may mean you need to rethink the area you want to buy into, or property type.
Lower property prices
With less money in the system, property price growth has eased, at least for the short term. Less money in any market applies downward pressure on values so you may find yourself in a catch 22 situation where you’re offered a lower amount as a loan on a property that has dropped in value compared to the peak of the market – but you still can’t raise enough to buy it!
Other credit crunches
The crunch on housing credit is likely to have a flow on effect. Expect it to become more difficult to get credit for other items, such as cars, home improvements and so on.
Changes to financial advice
The commission findings are likely to significantly change how you are charged for receiving financial advice and mortgage assistance. Advisers will no longer be allowed to write a loan and walk away which is a good thing for consumers. If you require assistance down the track, your broker will have to respond – although good brokers and advisors have always taken this approach.
Double-down on this aspect of your relationship with your financial adviser or broker. Look for a broker or adviser that you want to work with long term. Commission structures will most likely be simplified under the changes expected from the commission to a flat-fee and upfront payment model.
First-home buyers can expect greater protection from over-committing to their mortgage in the aftermath of the royal commission. Banks will be more diligent in providing the appropriate level of loan, rather than risking giving credit to customers unable to meet repayments.
But you’ll also find your expenses under much tighter scrutiny. You’ll need to show a strong track record of savings and expense management, including good credit card control. To assist your application, make sure your tax returns are up to date.
Any loan applicant should reduce their household expenses as much as possible for the three months before applying for a loan. This should maximise the amount of credit that will be made available.
A second and significant outcome is proving to be a dampening of property values because banks are reducing the levels of individual loans, or rejecting applications outright. This lack of credit is placing downward pressure on property markets creating price falls in some markets.
If you are a first-time buyer, this is good news – it means property is now the most affordable it has been for many years.