Sunday, 26th May 2019

What is responsible lending and why does it matter?

  • Mrs. Mortgage
  • 13th January, 2019
What is responsible lending and why does it matter?

With tighter lending criteria being applied to borrowers, this article explains what responsible lending is and what is required when applying for or refinancing a mortgage, and why.

Whether it’s due to over-enthusiastic lenders or desperate borrowers, failure to adhere to robust lending standards can land some borrowers in serious financial distress. In many cases the difficulties experienced by these borrowers could have been avoided if the lenders had complied with their responsible lending obligations.

In brief, this means inquiring into a borrower’s financial situation and requirements, verifying the information supplied, and making an assessment as to whether or not the credit contract is suitable for the borrower. Ideally, the lender should also consider the ability of the borrower to maintain loan payments if there is an increase in interest rates. This is a common pathway into mortgage stress – the situation where loan repayments take up too large a fraction of household income.

The Inquisition

In the past, lenders often relied on loose assumptions of household expenditure when estimating a borrower’s financial commitments. That’s no longer the case, so if you’re looking for a new loan or to refinance an existing one, be prepared to provide the following information and documents:

  • The amount and source of your income, and duration and type of employment. This will need to be documented via payslips or through bank statements and tax returns if you are self-employed.
  • Your fixed expenses such as rent, other loans, credit cards, child support, insurance premiums and school fees.
  • Your variable expenditure, including food, holidays and entertainment.
  • Your age and number of dependants.
  • Details of your assets with a focus on financial assets.
  • Information on any foreseeable changes such as retirement.
  • You can also expect your prospective lender to delve into your credit history.

    If you are using the loan to buy an investment property make sure you disclose this. You will likely face a higher interest rate, but don’t be tempted to deceive the lender. They are adept at detecting so-called ‘occupancy fraud’. You may also need to come up with a bigger deposit on an investment property purchase. This will decrease the sum you can borrow, limiting the price range in which you can buy.

    Age needn’t be a barrier to taking out a home loan. However, anyone borrowing with a likelihood of retiring before the loan is paid off needs to have an exit strategy. This could be paying off the loan with superannuation, downshifting to a cheaper home, or even taking out a reverse mortgage.

    Tighter adherence to responsible lending practices could likely lead to a reduction in the amount that people can borrow. However, this reduction in the amount of money flowing into the housing market should dampen down growth in house prices. Overall, more responsible lending may not have a major impact on housing affordability, but preferably see a reduction in the number of households experiencing mortgage stress.

    Prepare ahead

    Having answers to all the questions and the right documentation will come in handy when it’s time to apply for a loan. If a new loan or refinancing an existing one is on your radar, ask your financial adviser to help you prepare ahead of time.

About the Author

Mrs Mortgage is, in fact, a real, live person better known to her friends as Jennifer Schelbert.

Jennifer is a director of Mrs Mortgage and is also a licensee of Choice Aggregation Services - she is also a full member of the Mortgage and Finance Association of Australia (MFAA).

Jennifer Schelbert Credit Representative number 398747 of Mrs Mortgage Corporate Credit Representative number 396742 (ACN 063 827 216) of BLSSA Pty Ltd (Australian Credit License No. 391237)

Disclaimer: This document is for information purposes only, and must not be relied upon as a substitute for professional services or legal advice.


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