Updated: Feb 23, 2022
If you’re in the market for a mortgage or investment property loan, you’ve probably heard that the government body that oversees lending has recently introduced tougher hurdles. My Finance Agent founder Christopher Jonson explains the changes and who is affected. Watch the video or read below.
Who makes the rules about lending?
The Australian Securities and Investments Commission (ASIC) is the government body responsible for overseeing credit and lending rules in Australia. ASIC's lending rules are designed to protect borrowers by making sure that lenders are responsible in how they extend credit to borrowers.
For example, ASIC requires lenders to:
Make reasonable inquiries about a borrower's financial situation and their requirements and objectives
Take reasonable steps to verify a borrower's financial situation
Make an assessment about whether the credit contract is suitable or not for the borrower
Lending rules can change
In light of skyrocketing house prices across Australia, as of October 2021 ASIC made some changes to lending rules. Lenders now have to test whether new borrowers could still afford their mortgage repayments if their home loan interest rate was to be 3 percent higher than their current rate.
"Let’s say your home loan rate is going to be 2.5 percent. The bank will assess your ability to repay the loan at 5.5 percent. In the industry, we call this 'lifting the floor rate' and it performs a couple of functions."
Chris Jonson, My Finance Agent
Why the changes?
Firstly, the tightened rules help to protect lenders, borrowers - and the economy - against risk of defaults (borrowers not being able to pay their loans) by building in a buffer between the current loan repayment amount and how much the borrower could afford to repay if interest rates go up.
Secondly, it aims to cool the property market by reducing the number of buyers competing for properties. If you remember high school economics, when demand goes down, prices should follow.
Which borrowers are affected?
Do the new rules affect everybody? No. The changes only apply to new borrowers.
Does this mean that new borrowers should give up on the idea of buying a home? Definitely not! But it does mean you might need to adjust your expectations.
That’s where a broker comes in. We can help you navigate changes like this, as well as first home buyer programs, and help you come up with a clear strategy!