How the Banking Royal Commission Changed Home Lending

Introduction

The Banking Royal Commission, which concluded its findings in early 2019, has had a significant impact on the Australian home lending landscape. This inquiry was initiated to investigate the practices and behaviours of financial institutions, particularly in relation to their treatment of customers. As a result, several changes were implemented, leading to stricter lending criteria and a focus on responsible lending.

In this blog post, we will explore how the Banking Royal Commission has changed home lending in Australia, offering practical advice on navigating these new waters.

Key Changes in Home Lending Practices

Stricter Verification Processes

One of the most notable changes stemming from the Royal Commission is the implementation of more stringent verification processes for borrowers. Lenders are now required to conduct thorough assessments of a borrower's financial situation, which includes:

• Detailed income verification
• Assessment of living expenses
• Checking credit history
• Employment stability

This means that borrowers may need to provide more documentation than before, including bank statements, payslips, and tax returns. It's essential to be prepared with these documents when applying for a home loan.

Responsible Lending Obligations

The Royal Commission reinforced the concept of responsible lending, which obliges lenders to ensure that loans are suitable for borrowers based on their financial circumstances. This includes:

• Assessing whether the borrower can afford the loan repayments without undue hardship
• Ensuring that borrowers understand the loan products they are applying for

As a prospective borrower, it’s crucial to assess your financial stability and ensure that you are not overstretching your budget. Consider using a mortgage calculator to help determine what you can realistically afford.

Changes to Loan Products

In response to the Royal Commission’s findings, lenders have also adjusted their loan products. Some of the key changes include:

• **Higher interest rates**: Some lenders have increased interest rates to cover the risk associated with stricter lending guidelines.
• **Reduced loan-to-value ratios (LVR)**: Many lenders now require larger deposits, meaning that you may need to save more before applying for a home loan.
• **Tighter credit policies**: Some lenders have become more selective regarding who they lend to, often focusing on borrowers with pristine credit histories.

These changes can impact your borrowing capacity, so it is important to stay informed about the current lending environment.

Practical Tips for Borrowers

Assess Your Financial Situation

Before applying for a home loan, take the time to assess your financial situation:

• **Budgeting**: Create a detailed budget that outlines your income, expenses, and savings. This will allow you to identify how much you can comfortably afford to borrow.
• **Credit Report**: Obtain a copy of your credit report and check for any inaccuracies or areas for improvement. A good credit score can improve your chances of loan approval.

Get Pre-Approved

Consider seeking pre-approval for a home loan. This process involves a lender assessing your financial situation and providing an indicative estimate of how much they are willing to lend you. Pre-approval can provide you with a clear understanding of your borrowing capacity and streamline the home-buying process.

Consult a Mortgage Broker

Given the complexities of the current lending landscape, it may be beneficial to consult with a mortgage broker. A broker can help you navigate the various lenders and products available, ensuring you find the right loan for your circumstances.

FAQ

How has the Royal Commission affected my chances of getting a home loan?

While the Royal Commission has led to stricter lending criteria, it has not made home loans impossible to obtain. Borrowers who present a stable financial situation, maintain a good credit history, and demonstrate responsible financial behaviour may still be eligible for home loans. Engaging with a mortgage broker can provide tailored advice based on your specific circumstances.

Conclusion

The Banking Royal Commission has undeniably reshaped the home lending landscape in Australia, leading to more responsible lending practices and stricter verification processes. While these changes may present challenges for borrowers, they also promote a healthier financial environment for consumers.

If you are considering buying a home or are unsure about your borrowing capacity, speak with Timothy Yang at Northmark Finance for personalised advice tailored to your unique situation.

Disclaimer: This blog post is general information only and should not be considered financial advice. Always consult a qualified professional for personalised guidance tailored to your specific needs.