Calm after the financial storm?

— 10 min read

It’s been quite the roller-coaster ride this last financial year with so many changes to the lending landscape!

From credit reporting to borrowing capacity, a lot has been altered. Here’s some of what you may want to know the next time you apply for a loan:

Comprehensive credit reporting

As of 1 July 2019, banks will be required to share 100% of their data with credit reporting agencies such as Equifax.

Hence, your full financial history and account conduct is now accessible and shared any time you apply for finance or change utility company.

Since your bill-paying habits and loan conduct is a powerful tool for lenders to predict future loan behaviour, the sharing of credit information will reduce the misinformation between borrowers and lenders, where now all your financial history will be recorded and shared.

Previously, lenders would base their assessment of a potential borrower solely on whether there had been any negative notations in their credit history such as defaults, judgements or bankruptcies.

But now lenders will have access to a deeper set of data, which arguably would encourage competition for customers and small businesses with positive credit histories.

The new credit reporting rules will improve the capacity of lenders to meet their responsible lending obligations, as they will have a more holistic overview of your financial commitments.

Your debts also include outstanding tax payments to the ATO

The Australian Tax Office, with its new unprecedented power, can also disclose to Credit Reporting Agencies, the tax debt information of self-employed customers and businesses that have not effectively engaged with the ATO to manage those debts.

Not surprising when the ATO is owed $19b in overdue tax, approximately two thirds of which is owed by small businesses with an annual turnover under $2m.

It is no wonder the Government wants to reign in overdue tax and improve the transparency of tax debts.

The credit reporting is initially only being applied to businesses with an ABN and tax debt of more than $10,000 that is at least 90 days overdue, but this may change.

Defaults being recorded on a taxpayer’s credit file will have immediate and lasting consequences, as these are black marks lasting five years.

Hence, early engagement with your Accountant and the ATO to manage unpaid tax is crucial.

You will be risking a bad credit report if you try to buy more time to trade out of your tax liabilities.

Alternatively, your finance broker can also suggest funding options for tax payments that may be better suited than a payment plan with the ATO.

Can you afford to borrow more?

The lending market is overwhelming with new government regulations, rate fluctuations and lender credit policy changes.

The Australian Prudential Regulation Authority (APRA) is shortly due to end its 4-week consultation period on possible revisions to serviceability assessments on residential mortgage loan applications.

APRA first introduced the serviceability guidance in December 2014 as part of its efforts to reinforce sound residential lending standards.

In particular, the interest rate buffer served an important purpose in limiting excessive borrowing in an environment of low interest rates and high household debt.

APRA has now proposed removing its guidance that lenders should assess borrowing capacity using a minimum interest rate of at least 7%.

Banks may be permitted to review and set their own minimum interest rate floor for use in serviceability assessments, most likely to be 2.50% above the actual borrowing rate.

This revision recognises that the current interest rate environment does not warrant a mandated uniform interest rate floor of 7%, particularly across all loan products.

What does that mean for borrowers?

Potentially up to a 9% increase to your borrowing capacity.

And with the Reserve Bank having cut interest rates by 0.25% with potentially another rate cut flagged before year end, this may further boost borrowing capacity by up to 14% above what it was a month ago.

If you haven’t reviewed your lending structure and rates with your bank or broker against other market offers, now is the time. It could potentially save you a significant amount of money.

Added scrutiny of finance applications = lengthier assessment times

As a doctor and business owner, your time is precious. But you may have to dedicate more of it to be able to secure appropriate and flexible lending solutions for your personal and business affairs, as it is an essential step in maintaining a healthy financial plan.

Throughout the last 12 months and going forward, the application process now takes longer and needs to commence a lot earlier for finance to be made available within prescribed deadlines.

Pre-approvals are essential before making offers on any property acquisitions. Early consultation with your lender or broker and timely provision of supporting documentation will be essential.

Following the Banking Royal Commission, lenders now scrutinise statements and compare the expenditure against what applicants declare as their living expenses.

All liabilities must be declared on the application form. These will be evident on the client credit profile and may also appear as debits on transaction or credit card accounts.

Borrowers need to be realistic about any additional expenses they have such as annual holidays, investment property expenses, child maintenance, private schooling or childcare costs, Uber Eats and true cost of utilities.

It is not uncommon for applicants to under-estimate living expenses, so it is prudent to check the last three months of total debits for transaction and credit card accounts in order to obtain an average of true lifestyle costs.

Final Thoughts

While the credit landscape remains cautionary, the lending process doesn’t need to be daunting and there’s some definite upside for borrowers. Being well informed and getting the right advice means you’ll in the best position to establish and maintain appropriate lending terms. If you’d like to arrange a no-obligation chat with a DPM lending consultant, click here to book an initial consultation.

 

A version of this article can also be found on AusDoc

The information contained in this article is general and is not intended to serve as advice. Your individual needs have not been considered and you should not act or fail to act on the basis of the information contained in this article. Any views expressed in this article are opinions of the author at the time of writing. The information in this article is believed to be accurate at the time of publication. The information in this article has been approved by Doquile Perrett Meade Partnership ABN 96 821 307 818, Doquile Perrett Meade Financial Services Ltd Australian Financial Services License (AFSL) 239690 and DPM Lending Pty Ltd Australian Credit License (ACL) 374850. DPM Financial Services Group recommend you obtain advice concerning specific matters before making a decision.

Authors

Eyal Judah

Consultant
Melbourne

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Eyal joined DPM with over 18 years’ experience in corporate, business and retail finance. He has previously worked as a senior lending manager at Bank of Melbourne as well as a business banking manager at NAB’s Major Client Group division. With a wealth of industry knowledge and a passion for property and finance, Eyal believes that customer centricity and advocacy is paramount.