Are you a little impulsive when it comes to late night online shopping? Maybe you recently signed up for a gym membership because a cute girl or guy cornered you at the train station, even though you know full well that you live three suburbs away.
Now is the best time to rein in those unnecessary expenses because lenders will now be looking more closely at your spending habits and it will have a big impact on your ability to borrow for a home loan.
What are ASIC’s new lending rules?
Earlier this month, the Australian Securities and Investments Commission (ASIC) introduced changes to the National Consumer Credit Protection (NCCP) in response to a soon-to-be resolved court case involving payday lender, The Cash Store, and its funder, Assistive Finance Australia.
The companies could face up to $7.7 million in fines after the Federal Court found the firms guilty of breaching their responsible lending obligations for almost all of the insurance policies that were sold, specifically failing to make a preliminary assessment in the sale of insurance and not undertaking reasonable enquiries regarding the customer’s financial situation.
Because of this, ASIC (the regulator) has updated the NCCP Act by introducing Regulatory Guide 209 ‘Credit licensing: Responsible lending conduct’ (RG 209).
“The decision of the Federal Court makes it clear that to enable a meaningful assessment to be made as to whether a loan is suitable, credit licensees must inquire about the customer’s current income and living expenses along with further information depending on the circumstances of the particular consumer involved,” ASIC stated.
The regulator added that lenders cannot rely solely on benchmark living expenses such as the HPI and HEM.
What this means for you as a borrower is that lenders will be casting a “wider net” and looking at expenses that you would have never believed could have an affect on your borrowing power.
Use our How Much Can I Borrow? calculator to discover how much you may be eligible to borrow based on your income, your level of debt and the lender you choose.
For example, if you and your partner each earned $60,000 p.a. and you wanted to borrow $700,000 to buy a home, your ability to borrow could be seriously diminished if you both had a $100 a month gym membership.
In fact, the difference could be as much as $30,000, with your estimated borrowing power at $877,000 with the memberships and $907,000 without it.
Keep in mind that these are examples only and there is a difference between how much you “can” and “should” borrow.
What expenses will the banks take into account?
As with most regulations from the government, these changes to lending rules are quite vague.
What RG 209 does stipulate, however, is that apart from the borrower’s current amount, source of income, fixed living expenses (rent, repayment of existing debt) and variable living expenses (food and utilities), ”reasonable inquiries” for lenders to make may also include:
- Take-away food
These are just guidelines though and each bank has their own unique way of assessing personal expenses in order to meet the requirement of the NCCP Act. Some banks “dig deep” while others are a little less conservative.
For example, if it’s a gym membership or cable television subscription, some lenders will accept a letter confirming that the expense was once off or can be cancelled.
“We investigate a client’s living expenses by asking them what their spending is like when compared to households of a similar size,” Home Loan Experts managing director Otto Dargan said.
“We also investigate other expenses such as gym memberships and private school fees to make sure that these will not affect our customer’s ability to repay the home loan that we’re applying for.”
For lenders to take into account small, one off expenses when assessing your ability to pay off the loan goes too far, we believe.
Although the changes are great for large expenses such as private school fees, expenses such as internet subscriptions, daily travel costs, sports memberships, wine clubs or magazine subscriptions can be reduced or eliminated quite easily if you were to ever fall into financial hardship.
What is the HPI and HEM?
When the NCCP Act was first introduced it required lenders and mortgage brokers to make reasonable inquiries into a customers income and expenses but no one really knew what that meant in practice.
Up until 2012, most of the major banks relied heavily on the HPI to calculate the living expenses for their borrowers. This then changed to the HEM as it was determined to be more accurate.
With these new changes to lending guidelines, the regulator is hoping lenders will be less reliant on both the HPI or the HEM when assessing personal expenses and assess consumers on a case by case basis instead.
Again, each lender has their own policy when it comes to assessing your borrowing power. Luckily for you, our senior mortgage brokers are credit experts and know the lending policies of close to 40 lenders.
That means we can find a lender that will take a common sense approach to your living expenses.
Call us today on 1300 889 743 or complete our free assessment form to speak with one of our broker today.