The Australian Prudential Regulation Authority (APRA) have tightened lending processes over the past 12 months. In addition to changes to interest-only lending, APRA have cracked down on ensuring lenders dig deeper with their client’s household and living expenses.
Essentially, this means that two different borrowers could present with the same income, but their varying level of expenses and liabilities will determine their borrowing capacity. Historically, expenses have been looked at through industry benchmarks such as the Household Expenditure Measure (HEM) rather than itemised actuals, meaning the focus was on incoming rather than the reality of what was also outgoing.
APRA’s Wayne Byres, in the quest for a push for more diligent lending practices, communicated the need for increased visibility as a means of industry risk-assessment. According to The Adviser, Byres reported as of late last year that housing debt-to-income ratio was at an “all-time high” at nearly 200 per cent.
What Does This Mean For Borrowers?
Put simply, consumers will need to be organised and have a good grasp of all of their outgoings prior to engaging the borrowing or refinancing process. It also means brokers will be better positioned to present the most appropriate loan options to their clients.
If budgeting seems daunting, it’s a task that can be kicked off simply by tracking day-to-day expenses; a week-to-week picture should then start to take shape before factoring in annual expenses such as car registration, insurance etc.
From there, a simple spreadsheet will suffice. The ASIC has an online budgeting template which can be used or adapted to suit. Other debts or financial arrangements such as HECS-Help and salary sacrificing should also be factored in. As should assets such as vehicles, share investments and super funds.
Having a compiled, clear picture ready before you begin the lending journey will make the process all the more seamless.
This is a positive step forward for the industry and one that will drive brokers to dig deeper. My Expert director, Brett Wadelton, agrees, “people typically dread the ‘B word’ – they dread controlling budgets; they dread having them managed. But at the end of the day, a simple and organised budgeting system is an awesome exercise in itself”.
Wadelton believes that budgeting then flows onto planning, which ultimately helps people achieve their financial goals sooner, eventuating in wealth creation, “it’s actually allowing us to have a deeper conversation with our clients about their long-term savings and investment goals. The industry has never had to do that – this is a really good thing.”