It could soon become harder for Aussie families to secure a loan directly from lenders without expert help, with the prudential regulator warning people to prepare for a crackdown on lending standards.
APRA’s main concern is that banks and other lenders are underestimating their borrowers’ living expenses when loans are applied for.
As a result, it’s feared borrowers have less money to pay off their mortgages each month than currently believed.
“Lenders know that borrowers have difficulty estimating their expenses and have an incentive to understate them,” said APRA chairman Wayne Barnes at in his keynote address at the Australian Securitisation Forum 2017 in Sydney on Tuesday Nov 21.
“So as a safeguard, (lenders) will typically use the higher of the borrower’s estimate and their own benchmarks of what a minimum level of living expenses is likely to be.”
So if safeguards are in place, how are living expenses being underestimated?
Well, APRA believes that banks aren’t doing their darndest to find out exactly what their borrower’s actual living expenses are.
And the benchmarks the lenders are using? Well, in March APRA labelled them as “too simplistic” and only representative of a modest lifestyle.
And these benchmarks are being used a lot.
Let’s take a look at some of the data APRA revealed on Tuesday. It was compiled from 400 loans made by a number of large authorised deposit taking institutions (ADIs) to dual borrowers with no dependents.
The data showed that for borrowers with household incomes of $40,000 or less, the ADIs used their own living expense benchmarks every single time.
In other words, they didn’t bother to make an accurate assessment of what the individual borrower’s expenses actually were.
Furthermore, about 80% of loans to households with incomes up to $100,000 and $200,000 also used the ADI benchmarks. Meanwhile, household incomes greater than $200,000 had the benchmarks used about 60% of time.
“We would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient,” said Barnes.
So what’s APRA’s next step?
Well, in Barnes’ own words, APRA will devote “a large portion of our supervisory resources to housing in 2018”.
“Sound lending standards are an essential foundation on which the health of the Australian financial system is built,” said Barnes.
“It is in everyone’s long-term interest to maintain sound standards when times are good. That is, after all, when most bad loans are made.”
So what does this all mean for me?
With APRA to crack down on lending standards in 2018, it will be important to get help securing finance.
We can sit down with you and help accurately determine your actual living expenses. We’ll then be able to calculate exactly how much money you have to pay off your mortgage each month.
Using that information, we’ll then help you secure the perfect home loan with a reputable lender.
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