In September, the federal government made a shock announcement ahead of the budget. Responsible lending laws were set to be scrapped in, what the Treasurer called, “the most significant reforms to Australia’s credit framework in a decade”.
But what are responsible lending obligations? Why are they “no longer fit for purpose”? And, more importantly, what does this all mean for you?
Responsible lending in a nutshell
Under the National Consumer Credit Protection Act 2009, lenders have a legal responsibility to make sure borrowers can afford to repay a loan without falling into “substantial hardship”.
What this means in practice is that every time you apply for credit, lenders scrutinise your bank statements to make sure they don’t grant you a loan that falls foul of the rules.
This is the responsible lending obligations at work.
Why are the laws going to be axed?
Following the economic fallout from COVID, Australia entered its first recession in 30 years.
The government believes that making it easier for Australians to borrow money will help stimulate the economy. So, they’re scrapping the responsible lending obligations and replacing them with new, flexible rules that are less strict and rigid.
What does this mean for you?
The new rules shift the responsibility from the lender to the borrower when it comes to proving they can afford a loan.
This should make it easier for you to get a mortgage or refinance your home, because lenders will no longer need to forensically examine applications. Approval turnaround times should also speed up and, potentially, your borrowing power could increase.
Lenders will still need to comply with lending standards set by APRA (the banking regulator). So they’ll still vet your income, credit score and other financial information when they assess your application.
In the new environment, it will become more important for you to understand your finances, because it’s never a good idea to take out a home loan you can’t repay.
You’ll need to look at all your incomings and outgoings each month to see what repayments you can afford. Take into consideration that big life changes, such as kids or ill health, may impact your ability to pay off a home loan in the future.
A broker will act in your best interests
A good mortgage broker can give you the advice you need to make a well-informed decision. They’ll work with you to understand your financial circumstances, needs and goals – and then find you a loan that best suits your situation.
More importantly, you can rest assured their recommendations will always be in your best interest.
That’s because, under best interests duty obligations which start on 1 January 2021, mortgage brokers will have a legal obligation to act in the best interests of their clients. If there’s any conflict of interest, brokers will have a legal obligation to put your interests ahead of their own.
Want the right home loan for your circumstances? Get the advice you need by working with Newy Finance. We’ve helped hundreds of Novocastrians get finance – and we can help you too. Contact us by calling 0410 699 969.