The findings of the Royal Commission have shocked the home loan industry. Banks have been exposed as neglecting responsible lending standards in pursuit of profit, including not thoroughly verifying expenses in home loan applications. This puts borrowers at risk of being unable to refinance their home loan, being under financial stress in meeting repayments, and in worse cases, defaulting on their loans – particularly if we see a slump in the housing market or increases in interest rates. Now that Commissioner Kenneth Hayne has submitted his final report, there may be some upcoming changes that will impact how Australians get a home loan.
Within two years, you may need to pay a fee upfront to use a broker.
One of the major issues uncovered during the Royal Commission is the role of the broker in the home loan process, and how they are paid for their service. Banks currently pay brokers an upfront commission (for bringing a customer to them), as well as a trailing commission while the customer is still with the bank. Both of these commissions are dependent on the loan size and can vary depending on the bank. Hayne recognised this payment ‘compromised’ the ability of the broker to give unbiased loan options, as well as giving the brokers an incentive to encourage the customer to borrow more (i.e. the larger the loan, the bigger the commission).
The outcomes (should the commissions’ recommendations become law):
- Within 18 months, lenders will be prohibited from paying trailing commissions to mortgage brokers on new loans.
- Within the following 18 months, lenders will be prohibited from paying other commissions to mortgage brokers.
What this means for you:
- Brokers will need to be paid somehow, so if not by the lender, it will need to be the customer.
- Rather than go to a broker, customers may be more likely to do their own research online and find the right home loan for themselves.
- Brokers have been responsible for finding around 50% of banks’ home loan customers. If customers start using brokers less, banks will need to rethink how they can accommodate customer volumes, which may include embracing technology solutions (like Tic:Toc!).
Your home loan assessment will be based on your actual expenses and income.
One of the key issues exposed from the Royal Commission was a lack of basic checks on the household expenses for home loan applicants. Assessing your expenses helps the lender to determine whether you can afford to make your repayments. It’s also part of any home loan lender’s responsible lending obligations. Hayne recognised the banks have already been moving in the right direction in more responsible validation of customers' financial position.
- No drastic intervention required. Yet.
What this means for you:
- When you apply for your home loan, you will be assessed as to whether you can afford your home loan based on what’s actually coming in and out of your bank account – including some discretionary spending such as UberEats!
- Banks are currently doing this more stringent assessment manually, which is taking them more time (and money). They may need to pass on some of this cost to the customer via higher rates or fees, or they’ll need to consider using technology to digitally validate customer expenses – like Tic:Toc!
What Tic:Toc thinks.
This is the industry’s opportunity to create better outcomes for the customer – in cost, convenience and responsible lending – by creating a future strategy that leverages the data and technologies available. The royal commission has shown that Australians’ trust in banking processes are at their lowest ebb. Showing leadership and rebuilding the way the industry is governed and fulfils the customer need (ethically and transparently, to deliver home loans responsibly) will be the most important next step for all of us in the financial services industry.
Tic:Toc has already developed the technology to do this, and we will keep learning and improving. With the will to change and some strong government regulation, the rest of the industry could easily follow suit.
In case you missed our first installment, you can read it here.
Learn more about Tic:Toc here.
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