The big four banks are currently tightening their lending practices due to the inquiry being conducted by the Banking Royal Commission. As such, if you are currently applying for a home or business loan, you might find it more of a challenge than before.
We look at how the inquiry is impacting borrowers and why engaging a broker to help you navigate any uncertainties can be a wise move.
What is the inquiry by the Banking Royal Commission about?
The principle role of the Banking Royal Commission is to look into cases of misconduct by Australia’s major banks and financial institutions. The latest interrogation has so far uncovered: bribery, forged documents, mis-sold insurance and breaches of responsible lending practices.
The last major reform to ethical standards in the finance industry was the National Consumer Credit Protection Act (NCCP) in 2009, and any reforms that come out of the Royal Commission inquiry will add to the NCCP reforms.
However, until the report comes out in Feb 2019, there will continue to be uncertainties across the financial industry which might see banks become even more stringent with their lending practices.
With AMP’s chief executive the first high profile casualty to stand down, this has unsurprisingly spread a degree of paranoia amongst the financial industry, particularly amongst the big four banks; Commonwealth Bank, Westpac, ANZ, and National Australia Bank, who are being scrutinised.
As such, these banks have diverted a considerable amount of resources (people, time, and management) to getting their houses in order, which has resulted in unprecedented compliance checks for borrowers.
How does the inquiry affect applying for a loan?
More stringent compliance checks have the potential to be detrimental to new businesses or homebuyers as application processes have lengthened and borrowers need to disclose more information than they would have before.
Banks are building in more ‘lending buffers’, that is, checks to make sure that borrowers don’t default on their loans. For example, many commercial banks are asking more frequently for bank statements for a personal loan.
A very fine line is being drawn, whereas previously a certain amount of subjectivity was used to approve loans. For example, if you had a history of good conduct that may have been enough to get your loan approved, however, the process is very black and white now.
This has resulted in less availability of money as the borrowing capacity is also being brought down to reduce borrower defaults.
More opportunities for smaller banks and second tier lenders
But even though the big banks have tightened their processes, this opens up an opportunity for smaller banks and second tier lenders, and increases the amount of lender options for borrowers to choose from.
A recent survey has found that there has been a 70% increase in the number of borrowers requesting loans from smaller banks.
The question is – which one to choose? Borrowers might be cautious in using smaller lenders compared to big banks (if they’ve always used the big banks) for three reasons:
- Competitive pricing
- Security and compliance
Here are some important points to consider for a loan application in the current environment:
- Knowledge – you need to know all the facts, and not all of it can be found online. Brokers know where to place the deals because they are in constant contact with banks and lenders.
- Plan early – talk to your lender or broker early to ask all the necessary questions and get everything in place ahead of time.
- Pre approval is critical – secure your credibility and give lenders the confidence in loaning to you, instead of raising any concerns that will put you in the grey area.
Big banks are busy getting their houses in order to satisfy the Banking Royal Commission that they are adopting prudent lending practices. For homeowners or business owners needing to apply for a loan, this means more stringent compliance checks on financial history and lengthier application times.
Smaller banks and second tier lenders, therefore, may be better a choice for borrowers in the current environment and increase the amount of lender options available.
There has never been a better time to engage a broker who is in touch with the market, up to date with the latest changes, and has established relationships with trusted lenders. A broker can help you navigate the uncertainties and challenges of getting a loan, compare all the options out there and provide the right advice.