Borrowers ‘underestimating’ post-loan commitments

Last week, the Australian Securities and Investments Commission (ASIC) released its Looking for a mortgage: Consumer experiences and expectations in getting a home loan report as part of a study based off its observations of 300 consumers who were in the process of taking out a home loan, as well as a survey of an additional 2,000 consumers.

According to the research, 10.5 per cent of borrowers who took out a home loan over the past 12 months were either struggling to meet repayments (9 per cent) or missed at least one repayment (1.5 per cent).

The survey found that first home buyers (FHBs) were most likely to encounter difficulties managing their loan repayment (13 per cent), followed by refinancers (11 per cent) and non-FHBs (6 per cent).

Further, of those consumers who said they either had missed repayments or were struggling to meet their repayments, the majority had initially thought they would have to alter their spending habits “a little” (20 per cent) or “a lot” (50 per cent).  

An additional 22 per cent said they initially felt “uncertain” about meeting repayments after attaining a mortgage, 4 per cent said they felt 'overwhelmed about trying to meet repayments', and 2 per cent had initially thought they’d 'comfortably' meet repayments.  

ASIC claimed that the findings suggest that borrowers are not adequately assessing their repayment capabilities prior to loan settlement.

“These findings possibly suggest that even though consumers are aware that they may need to tighten their spending habits when they take out a loan, they may be underestimating the changes they need to make,” the regulator stated.

The research has come amid ASIC’s review of its responsible lending guidance (RG 209), which has been in place since 2010.

Among the requested reforms to RG 209 was a consideration of changes in a borrower’s spending behaviour when conducting a serviceability assessment for loan application.

In its submission to ASIC, Westpac called for greater flexibility in the assessment of a borrower’s living expenses, claiming that responsible lending guidance should take into consideration a borrower’s willingness to adapt to changes in their financial position. 

However, appearing before ASIC during its first round of hearings in Sydney, chief executive of the Financial Rights Legal Centre Karen Cox rejected calls for considerations of changes to a borrower’s spending habits.

Ms Cox questioned the level of rigour involved in assessing home loan applications under existing arrangements and cast doubt over lenders’ ability to adequately asses a borrower’s capacity to adjust to changes in their financial circumstances.

The legal rights advocate accused some lenders of failing to engage in active conversations with borrowers about their ability to service a loan, claiming that some credit providers were too reliant on benchmarks.  

When asked if some level of reform to ASIC’s guidance to reflect a borrower’s desire to alter behaviour was appropriate, Ms Cox replied: “I’d be very worried about even endorsing the concept of belt-tightening to be honest. 

“I would worry that lenders would then take comfort in that and say, ‘It’s OK that their expenses are high, we’ve had a belt-tightening discussion’.”

ASIC has concluded its second round of consultation and is expected to publish an update of RG 209 before the end of the year.

[Related: ASIC urged mortgage industry to ‘step up’ game]