Looser lending restrictions: What do they really mean for borrowers?

By Helen Baker

October 23 2020
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A relaxation of lending requirements may seem like a win for borrowers, but it’s not all cause for celebration. Like all things financial, the devil is in the details.

Looser lending restrictions: What do they really mean for borrowers?

Ahead of its much-anticipated budget, the federal government unveiled plans to relax responsible lending laws. Effectively, it means borrowers will be more responsible for ensuring they can meet repayments rather than it being the responsibility of lenders to prove this.

There are some potential benefits of relaxed lending rules:

More first home buyers and older single people may be able to get into the property market.
Greater access to mortgages and loans means people can borrow at a time when interest rates are at record lows.
Spurring the housing market through lending has flow-on effects for the economy (think renovations and tradies, furniture and household goods, garden supplies, pets etc).

But consider these points and how easier access to loans does (or doesn’t!) alter them:

1. Budgeting

A household budget is never fixed – it changes depending on income levels, cost increases and changed family circumstances (e.g. the arrival of kids or relationship breakdown).

Simplified lending rules may mean you qualify for a loan you previously couldn’t, or can borrow more. But can you afford the repayments once rates inevitably rise, if your income suddenly goes down (especially as we’ve seen during the pandemic) or if your other costs increase?

The onus is on you to determine what you can and can’t afford.

2. Women still disadvantaged

Loan affordability has more to do with wages and deposit size than the actual lending rate. And easier access to loans favour those on solid incomes, with good savings and stable living situations.

The gender pay gap, a higher proportion of women in part-time/casual employment, COVID hitting casualised workforces proportionately harder, and domestic violence all restrict women’s ability to earn and save much more heavily than men. Eased lending rules won’t change this.

3. Property prices

Property prices can be sensitive to lending regulations. Tighter rules, as happened in recent years with investment property lending, saw house prices dip. More relaxed rules may see them surge.

If property prices do rise in response, those who would benefit most from relaxed lending rules might be priced out of the market anyway.

4. Good time to invest?

Easier access to loans may enable more people to begin investing and build wealth for their future.

That’s especially significant given many asset values are subdued due to COVID – meaning you could pick up a bargain.

Any investment involves risk, so always do your homework on the type of asset you’re buying, its affordability and level of risk.

5. Cost versus value

Low purchase prices aren’t necessarily a sign of good value, nor do high prices automatically equal quality.

Some new apartments in Sydney have become basically worthless after major building defects emerged. Cheap properties may become money pits if major repairs are needed. Share values can be wiped out by scandals, regulatory changes or even popular executives leaving.

What you buy with borrowed funds is still important, regardless of lending rules.

6. Interest only?

Consider what form any new loan takes. Interest-only loans can look attractive, as the minimum repayment is lower.

However, when rates are so low, borrowers can make big inroads by hitting that principal balance hard. Interest-only loans also have fixed time periods.

7. Do you need it?

Just because you can potentially borrow more, doesn’t mean you necessarily should.

Sure, relaxed lending may mean you can afford the big house in the suburbs, but do you really want it? COVID has seen many people relocate to regional areas. Others have become frustrated with the ball and chain of a mortgage, the extra cleaning more time at home demands, or discovered more maintenance issues.

Ultimately, consider the big picture. Better access to a loan may open up new opportunities (but won’t necessarily benefit everyone). Just make sure those opportunities will build you wealth and happiness, and not simply plunge you into greater debt!

Helen Baker is a licensed Australian financial adviser and author of two books: On Your Own Two Feet – Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce – Your Survive and Thrive Financial Guide.

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