The Hayne Royal Commission heaped buckets of criticism on our banks, and the ramifications are still rippling through the system. Last week the full Federal Court dismissed ASIC's appeal against Justice Nye Perram's decision, which found in favour of Westpac in a responsible lending case.
That case was about the bank's responsibility in assessing the ability of loan applicants to service a loan they apply for. A major focus was on Westpac's reliance on the Household Expenditure Measure (HEM), which is the standard benchmark most lenders use to estimate a loan applicant's annual expenses.
The decision turned mainly on whether a borrower who, prima facie, did not have the capacity to repay a loan, should be approved if the bank believed the applicant had the ability and the motivation to change their behaviour once the loan was approved.
The basis of ASIC's case was that Westpac had fallen short of its obligations under the National Consumer Credit Protection Act.
The learned judge observed that a loan applicant might regularly dine on wagyu and shiraz, but still have the ability to cut back on their spending, if a loan was approved and keeping up the mortgage payments meant the difference between having their house repossessed and getting the loan paid off.
It's been many years since I worked at Westpac, but I doubt if the lending criteria have changed much. We were always taught to use the four Cs: character, capacity, collateral and conditions. And, of course, there was a fifth - common sense.
Think about it - if applicants are of good character, you can assume they will do their best to meet their obligations, provided they have the capacity to pay. Offering sufficient collateral to the lender is a basic proof of the ability to meet a financial goal, and special conditions can be negotiated between the borrower and the lender if necessary. Special conditions could be an undertaking to cancel a credit card or pay off a personal loan.
Now I am sure you have all come across a young person who enjoyed their nights out, and didn't blink at $14 for a cocktail, but who changed their ways when they bought a home, took out a mortgage and had family responsibilities to think about. They understood they had to cut the spending on takeaways, stop having golf lessons, stop going to the dog wash, and stop going out every weekend for dinner.
This is also a wake-up call to anybody who is thinking of taking out a mortgage in the near future. My mortgage broker friends tell me that bank criteria are becoming increasingly tighter, thanks to all the recent bad publicity, and getting a loan is harder than ever, even though interest rates are at record lows.
The application process will be much smoother if they take the time to do their homework, research how their proposed lender would view an application, and adjust their spending habits to fit, if needed.
With interest rates low, and no increase in sight for years, it's the perfect time to buy a home, if you shop around and find a bargain. But to make that happen, you need the right loan: one that fits both your budget and your lifestyle. Just be aware of some of the tricks of the trade. For example, there may be a big difference between the rate quoted and the comparison rate, which is the effective rate.
Also, if you are considering a fixed rate, carefully check what the rules will be if you wish to make extra payments, transfer the loan to another property or pay it out before the term is up. Making sure of these aspects of the outset may save you much time and expense in the future.
- Noel Whittaker is the author of Making Money Made Simple and other books on personal finance. firstname.lastname@example.org