The Federal Government is set to turn the lending tap back on with responsible lending laws likely to be axed.
Under the plan announced by Treasurer Josh Frydenberg, responsible lending laws will be thrown out by March 2021, which could make it easier for borrowers to access credit.
Since the onset of COVID, policymakers including both the Federal Government and RBA have set their sights on making credit easier to come by.
One of the major roadblocks home buyers and investors have faced in recent years has been overly complex and often unnecessary responsible lending requirements.
Under the Rudd Government, responsible lending laws insisted that the buck stopped with the lender to ensure a borrower had the means to pay back a loan or risk being liable.
In a backflip of legislation, this will likely turn on its head with new policy placing the onus back onto the borrower.
The changes are likely to mean faster approval times and an increased number of borrowers being able to access credit than we’ve seen in over a decade.
Previously, responsible lending criteria meant lenders would require detailed breakdowns of living and ongoing expenses and it was up to the banks to make sure a borrower could repay a loan based on their personal circumstances.
With the removal of responsible lending, lenders will be able to accept a borrower's declaration around expenses and their ability to service a loan, making the application process both faster and easier on all parties.
New Loans on the Rise
Since the RBA slashed interest rates to record low levels and with a range of stimulus measures already in place at both state and federal levels, an increasing number of borrowers are already looking to buy residential property.
The latest data from the ABS reports a huge increase in lending with the total value of home loan commitments rising by 12.6% in August to $21.3 billion, making it the largest monthly increase in the history of this data being tracked.
President of the REINSW Leanne Pilkington believes policymakers moved too far on lending requirements and the time is now right to wind back red tape.
“I think that it all went a little bit too far before, getting a little bit too complicated and time-consuming to get loans approved for the banks.”
“I believe the Government is just trying to make things a little easier in terms of getting approved and hopefully this will be effective, but you never know until you see it working.”
With increased access to credit and low interest rates, Leanne Pilkington feels property markets should remain strong.
“We’re still in a seller’s market and there’s just not enough stock to go around. What we’re seeing in the likes of certain regional markets is crazy.”
Inflationary Pressure to Follow
Jacob Field, CEO of Ripehouse Group anticipates that the changes to responsible lending will likely cause a stampede of previously restricted buyers eager to take action.
“With restrictions removed, accessing money becomes far easier and as we know finance is the name of the game in property investment. This is already causing a rush to the gates.”
“Once these changes go through parliament, they will likely cause dramatic inflationary pressure on property prices.”
Mr Field says the Government is giving banks a mandate to lend which could fuel price growth in the months ahead.
“The Government is effectively printing money and then giving it to the banks and telling them to loan it out.
"Now the Government is taking the restrictions away around who can borrow that money.”
“More finance means people can pay more money for properties and that’s going to cause property prices to rise.
“If 10 or 15% more people can access finance when they previously couldn’t, that money flows over to the prices of property.”
Mr Field warns that buyers need to act fast and get pre-approved or risk missing out.
“It all comes down to finance. It’s a great time to buy anyway and we’re seeing a lot of good opportunities around the country.”
“Given the number of applications we’re seeing, you want to be at the front of the queue to get your application processed now. Get a pre-approval in place and that gives you options.”
Confidence Returning for Borrowers
Emmanuel Marios Principal of Derwent Finance has already started to see a sharp spike in interest from borrowers looking to get finance.
“Since the recent announcement, we have noticed an increase in finance enquiries by 20%.”
“It has been fantastic to see so many more new investors looking to come to the table due to the proposed changes.”
Mr Marios reports of a rapid improvement in borrower confidence after a long period where applications were subject to a lot of uncertainty.
“We are seeing investors coming to us with much greater confidence that their loan will be approved.
“We often see our investors have their loans declined for reasons that don't make sense because we know that they can repay them comfortably.
“With the easing of the lending requirements, this should be eliminated in a lot of cases,” said Mr Marios.