Episode Details

The government made an important announcement last week. This change could substantially increase your borrowing capacity in the next year. It is perhaps the most significant change that has occurred in the last decade and will further fuel property price growth.

I also wanted to update you on interest rates, particularly in light of recent expectations that the RBA will soon cut rates again.

A positive change for investors and the property market

In 2009, the government re-wrote the laws governing the provision of loans. This required mortgage brokers and lenders to ensure that any new loans provided to borrowers were ‘not unsuitable’.

The background is important

Since the introduction of this new legislation, the government (ASIC) has been gradually tightening the laws, particularly over the last 3 to 4 years. In October 2018, I compared the loan application process to a forensic investigation (see below). This was not an exaggeration.

A few months ago, even the Governor of the RBA agreed that the tightening of credit rules had gone too far. There have been many examples of banks trawling through bank statements questioning small ($20) expenses. This pedantic approach added very little to the quality of the credit assessment.

Your current spending tells me little about your ability to repay

Perhaps the most significant recent event was Westpac’s success in defending an action initiated by ASIC regarding its alleged non-compliance with the credit laws. This case is now referred to as the 'Wagyu and shiraz' judgment. That is because Justice Perram said "I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare…”.

When faced with the decision of whether to go out to dinner or make a mortgage repayment, almost everyone will make the right decision. To some degree, a high level of discretionary spending is arguably strong evidence that you have surplus cash flow that you could otherwise divert towards loan repayments.

The upshot is that 100 pages of ASIC guidance has created a very bureaucratic, inflexible, one-size-fits-all approach to assessing loans. This creates undue complexity, long delays, avoidable costs and sometimes perverse outcomes. No one wins.

The main proposed change is…

The main change proposed by the government is that lenders will be allowed to rely on information provided by borrowers, unless there are reasonable grounds to suspect that information is unreliable. This means the bank can ask you about your expenses and, in most situations, rely on the answer you provide. This avoids them having to trawl through your bank statements, like they do now. When formulating your answer, you can give consideration to what your “base level expenses” are. That is, all fixed and non-discretionary expenses. This may better represent your capacity to afford any proposed loan repayments.

In addition, the 'Wagyu and shiraz' judgment confirmed that it is acceptable for banks to use “benchmark expenses” when assessing a loan application. In this situation, some banks may not choose to ask you what you spend. The banks have a substantial amount of data about what their customers spend, which should allow them to determine reliable benchmarks.

Criticisms and what I hope happens

Thi