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Opinion: New lending laws will be a 'game changer'

Michael Yardney
·6-min read
(Source: Getty)
(Source: Getty)

Something changed last week.

And it’s going to underpin the rebound in our property markets in 2021.

You’re probably very familiar with the term “responsible lending” these days – after all, the Royal Commission hammered home the point that banks weren’t being “responsible lenders” for most of 2019.

Now, the government has done something of a backflip on their previous stance, which has the potential to drastically change you access to finance.

In a nutshell, Federal Treasurer Josh Frydenberg has announced sweeping changes to remove some overly restrictive responsible lending rules.

The goal is to make borrowing easier and more efficient for everyday Australians, in an effort to boost demand for credit and stimulate the economy.

You see, if people sit in fear at home, saving every penny for a rainy day (now that we know just how dire a rainy day can be), then the economy will stall even further.

People would spend less money in cafés, restaurants and shops; further jobs would be lost; the recession would deepen.

The government wants to avoid this type of situation at all costs, so what the Federal Treasurer is trying to do is to encourage people and businesses to spend and borrow money: it’s one of the most effective way to get the economy kick-started again.

So, what are these changes to responsible lending regulations?

And most importantly, how do they impact you?

While restrictive lending practices were introduced in 2009 after the GFC , lending became even tighter over the last few years following the Royal Commission when banks were fined billions of dollars for a range of mis-deeds.

These ranged from charging people for services or products they never received, to giving incorrect financial advice or selling wildly unsuitable products to customers, to in the most serious situations, causing financial ruin for some customers.

Because the Commission uncovered deep and systemic issues in the way that (some) banks treated and charged their customers, the government took a very strong stance to ensure that the people’s interests are better protected.

Now, Treasurer Frydenberg is winding back some of the rules and regulations that were implemented, stating in his announcement that “the principles which underpin responsible lending obligations have been implemented in a way that is no longer fit for purpose and which risks slowing our economic recovery”.

As a result, the National Consumer Credit Protection Act will be overhauled, with new more flexible lending rules to be implemented from March 1st, 2021.

What is set to change?

Many believe that the restrictions imposed by the government went too far, with even the Reserve Bank governor, Philip Lowe, stating that he believes that we have tightened our lending requirements too much under the guise of “responsible lending”.

This risk aversion to lending is having a negative impact on our economy – which is something we can’t risk continuing as we fight back against the economic ruin of the pandemic.

According to the Treasurer, changes set to take place next March include:

  • Simplifying Australia's credit framework to ensure consumers and small businesses can get timely access to credit;

  • Enabling a more efficient flow of credit to consumers and small businesses while maintaining strong consumer protections, through changes to Australian credit laws;

  • Improving the flow of credit to support business investment and create jobs.

What this means for you

So as an investor and/or a homeowner: what does all of this mean for you?

Firstly, it means that you are likely to be able to borrow more money (or have an easier time of being approved for finance) in the months ahead.

In return there will be an onus on borrowers to declare complete and accurate information as the responsibility will now fall on the borrower to show they can service their loans.

But it also means the banks won’t be checking how often your order UberEATS or your online shopping history.

Thinking strategically, it also means that there will be a window of opportunity between now and the second quarter of 2021 for savvy investors to really amplify their wealth position.

This is because if you take action and secure your next quality property investment now, you’ll be purchasing in an uncertain market where you’re more likely to have the upper hand in terms of price negotiations.

You’ll also be competing against fewer other buyers, which is the ideal position to secure your next asset.

But why does the “clock” expire in around nine months?

Well, by then, a whole lot of new buyers will be entering the property market, buoyed by a strengthening economy, growing employment and renewed confidence in the way Australia is heading.

This will serve to increase competition for property, which will potentially drive up prices and most importantly, absorb quality stock, making it harder for you to secure a solid investment.

This is likely to happy for two main reasons:

  1. Confidence. By then, the economic picture will be clearer, the recession will be turning a corner and consumer confidence overall will begin to return as we as a nation claw our way back from this financially devastating pandemic.

  2. Competition. Finance will be more freely available as a result of these changes, and those buyers who were previously restricted from borrowing (due to them not meeting the banks’ criteria, and/or temporarily losing or dropping their income during the pandemic) will be back in the market.

This means that the relaxation in lending rules scheduled for March next year is a real opportunity for strategic property investors.

This totally changes the game and serves as one of the clearest signals yet of an impending resurgence in the property market.

The question you need to be asking yourself right now is: how will you position yourself to capitalise on the rebound, as lending restrictions ease and sentiment improves?

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog and hosts the popular Michael Yardney Podcast.

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