Will the elimination of responsible lending make it harder to buy a home?
Some experts think credit reforms are a small readjustment, while others fear it will hurt unprepared borrowers and drive up house prices.
The Australian government is currently debating proposed changes to loan laws that will make it easier to lend and borrow money.
And economists and consumer advocates are now wondering if these changes will hurt borrowers and fuel more consumers. soaring real estate prices, or simply simplify regulations that currently make lenders overly cautious.
“Responsible lending is essential for the integrity of the Australian banking system and the security of our housing market,” said investment expert Michael Yardney, who also told Finder that “the forensic investigation into the The finances of potential borrowers significantly slowed the borrowing process.
Consumer credit advocates and financial advisers fear these reforms will make it easier for borrowers to find themselves in financial trouble or fall prey to unscrupulous lenders.
In February, Financial Counseling Australia published a responsible lending obligation survey. “Most financial advisers think this is a terrible idea,” said FCA CEO Fiona Guthrie, “with 97% of them saying they want the laws to stay and 94% saying the laws. are important consumer protection. “
Some real estate experts believe that the removal of responsible lending obligations will not have a detrimental effect, seeing it rather as an adjustment to a regulatory framework that has become too cautious.
The reforms are “a bit of a recalibration on the part of the federal government to bring things down to a [regulatory] environment, ”Archistar chief economist Dr. Andrew Wilson told Finder.
“A few years ago there was a bit of a hype in tightening investor lending restrictions. It is still very difficult for investors to get loans.”
There is certainly no consensus among market watchers and economists. In the Finder Walk RBA Cash Rate Survey ™ 55% of experts agreed that removing responsible lending obligations could lead to unstable household debt levels.
“History has shown that banks and households, on their own, are incapable of self-regulation,” said Matthew Peter, chief economist at QIC.
The Hayne Royal Commission, which investigated malpractice in Australia’s financial system, ended in 2019. The commission found numerous examples of lenders and other institutions behaving badly and concluded that responsible lending rules had to stay in place.
Are these reforms still necessary?
Much of the federal government’s motivation to relax lender rules was to stimulate economic growth during the COVID-induced downturn.
In September last year Treasurer Josh Frydenberg said: “Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can keep spending and businesses can invest and create jobs.”
But in the months that followed, the economy and unemployment figures began to recover, albeit unevenly. And house prices have started to rise dramatically again.
Part of the reason is that mortgage interest rates are now at record highs. This makes borrowing money cheaper, which drives up the price. Easing lending rules would only increase prices further.
“Currently real estate investors have a harder time getting financing than home buyers, ”Yardney said. “The easing of loan restrictions will attract more investors to the market, adding fuel to the already hot markets around Australia.
These credit reforms are likely to result in more borrowing and spending, giving the economy an overall boost as the government hopes. While these reforms do not end up hurting borrowers, they will only worsen housing affordability.
How exactly will the lending rules change?
The National Consumer Credit Protection Act 2009 regulates the activities of lending money to ordinary borrowers, including mortgages, personal loans, and other types of financing. Part of the law includes responsible lending obligations.
This rule states that lenders and other credit providers must offer borrowers a financial product that is “not unsuitable” for them. Lenders are obligated to educate themselves about a borrower’s financial situation and verify information about the borrower to ensure they enter into a loan deal that they are able to repay and that are suitable for their goals. financial.
The government is considering removing this rule in order to simplify the lending process. The government believes that the current regulations are too prescriptive, a “one size fits all” approach, and argues that other regulations have been tightened in recent years.
The bill is currently being debated in parliament, so the final details of the reforms may still change.