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Treasurer Josh Frydenberg has been in the spotlight since the last Friday, when he announced the government’s plan to remove the responsible lending obligations from the National Consumer Credit Protection (NCCP) Act 2009.
Removing responsible lending obligations by the bank does not mean that the banks will not face the consequences and can irresponsibly lend money to borrowers, and borrowers are not protected. This means that more responsibility will be placed on the borrowers to provide factual information to the banks, and the bank may be able to remove some of the onerous requirements when assessing applications such as:
- Reduce scrutiny on people’s historical spending, i.e. not having to question every single spending transaction on your bank statements. Banks will likely accept your declared living expenses to compare with the Household Expenditure Measure (HEM) benchmark and use the higher figure for assessment.
- Reduce applied buffers on your existing loan repayments, i.e. banks are currently adding a buffer to your existing loan repayments, and they may reduce this buffer in assessment.
- Make it easier for small businesses to borrow by defining more clearly regarding whether NCCP applies in particular circumstances i.e. if you borrow for business purposes it may be easier but you are not protected by the NCCP Act; currently it gets mixed up for small businesses, who are willing to take the risk when applying for business loans, but faces the red-tapes by the banks due to it being “potentially NCCP regulated”
The reforms may not be in effect until March 2021, but if and when it happens, you will
- Be held more responsible for providing factual information in a credit application. At the end of the day, it is mostly the Living Expenses piece, because the Comprehensive Credit Reports (CCR) are showing almost all of your debt and account conducts at other banks anyway so even if you wanted to hide anything, you can’t. This is the emphasis to differentiate the current context of lending, in direct comparison to what had been before responsible lending obligations were introduced in 2009, when some borrowers chose not to disclose debt at other banks to be able to borrow more.
- Have a more pleasant experience when applying for credit because of the reduced red tapes
- May be able to borrow slightly more, due to the reduced buffers and the lessen scrutiny on your historical spending habits.
- Likely see positive effects on property prices, however, it’s hard to predict the magnitude of the impacts given the current terrible state of our economy.
Ok, that’s the “short” summary, now here goes my take on what’s going on.
The public has had mixed responses to the deregulation. Some people actually get somewhat excited to hear this news, including some of our clients, who messaged me and asked: “Does it mean I can borrow more now?”. Even my sister asked me about it that night as she loves to be able to buy an investment property.
On the other side of the argument, many people, especially consumer groups believe that this deregulation will open up new opportunities for banks to aggressively sell debt, remove protections for borrowers and that what people need right now is more income, not more debt.
Now, we are not here to chime into the discussions of who is right or wrong. Because, first of all, as a finance broker, I am biased to favour this move by the government and, secondly, you see, everyone’s situation is different and so are their opinions.
People who want access to credit, such property owners and investors and business owners, like to be able to borrow more, especially when both home loans and business loans interest rates are between 2% to 3%. Property owners like this news too because it will likely help maintain properties prices at the current level, because nobody wants to see their assets lose value.
The criticises by the consumer groups that I have read online have also been quite “dramatic”, which is understandable because there have been many cases of the consumer finding themselves in hardship in relation to wrongdoings, irresponsible lending and “pushing products” by lenders. Additionally, Australians indeed have one of the highest household debt-to-income ratios and many people, including me, are concerned about the sustainability of our economic “wealth”.
The relaxation of lending criteria will likely help boost business activities, especially if it puts more focus on making it easier for business to borrow, which in turn will help the economy recover more quickly from the current crisis. Nobody likes having debt, and there are many negative perceptions about the banks, but they both are integral parts that help the economy functions effectively. So, even if you do not like it, debt is a necessary evil if you want to be more aggressive with your investment strategy, be it to buy one or multiple properties or invest in your business. I’ve said it before and will say it again, the key is to hedge your bet carefully. Knowing what you stand to lose is as important as what you can potentially gain.
If you need more information or any further concern, please do not hesitate to contact us.
Kind regards,
𝐾𝑖𝑒𝑛 𝑃ℎ𝑎𝑛 & 𝑃ℎ𝑢𝑜𝑛𝑔 𝑁𝑔𝑢𝑦𝑒𝑛.
If you haven’t read the announcement, here is the link (it is quite short).
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