Home loans explained
A summary of the Royal Banking Commission: Part Two
4 min read
The Royal Banking Commission has uncovered some shocking findings. We explain what they are, and how they could impact you.
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.
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).
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.
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.
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