Borrowing money for a mortgage? Tighten your belt


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You can forgo the wagyu and shiraz lifestyle, when you take out a mortgage, and make do on "much more modest fare" if you want a new home, according to Judge Nye Perram, who handed down his judgement in favour of Westpac's lending processes this week.

If your spending has been extravagant, explains Perram, you can always tighten your belt. It is up to the lenders to assess your spending patterns when you apply for a home loan. And now it seems they can do that whichever way they like.

The question for borrowers, however, is can you trust a bank or mortgage broker to lend you a suitable amount of money for a home loan that matches your financial circumstances? Or will crippling monthly repayments financially overstretch you? The current legislation exists to avoid hardship, but there can be much financial discomfort before hardship.

westpac mortgage court decision

These are crucial considerations for anyone taking out a mortgage. Often consumers rely on the bank to assess their ability to repay the loan, rather than working it out for themselves.

The royal commission exposed irresponsible lending by banks, with borrowers who should not have had their loan approved being financially devastated by repayments beyond their capability.

In these cases, the process used by banks to assess the capacity to repay loans was the culprit. About 80% of bank loans used the Household Expenditure Measure (HEM), a tool that calculates a borrower's expenses and ability to manage repayments, which then helps determine how much they can borrow.

But critics of the HEM say it seriously underestimates a person's living expenses, potentially leaving them on struggle street and unable to meet their repayments. Another issue is the borrower's lack of understanding of interest-only loan periods, and the subsequent sharp rise in interest-and-principal repayments after the interest-only time frame has ended.

In many cases, a bank's loan assessment, the royal commission found, is not a reflection of a borrower's ability to repay the loan.

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Regulator ASIC accused Westpac of lending irresponsibly to 261,987 customers of Westpac-branded home loans from December 12, 2011 to March 2015.

ASIC believed the banks' borrower assessment process didn't meet the responsible lending legal requirements for lenders to work out whether or not a loan is suitable for consumers. Using the HEM didn't take into account actual expenses, alleged ASIC. Also in assessing home loans with an interest-only period, ASIC alleged that Westpac failed to regard the higher repayments at the end of the interest-only period, as required.

Originally Westpac was forced to pay a $35 million settlement to ASIC in September last year but Perram rejected the settlement and forced the case to go to trial.

ASIC, however, was dealt a blow in the Federal Court when Perram dismissed ASIC's case against Westpac on Tuesday.

Perram found that a lender "may do what it wants in the assessment process".

For the time being, banks are officially off the hook when it comes to what process they use for assessing mortgages and can make their own assessment about whether a borrower can repay the loan. That is until ASIC tightens the rules around responsible lending, which it is in the process of doing, with new hearings on responsible lending guidelines.

However, Westpac customers who have joined the class action against the bank, run by law firm Maurice Blackburn, still have a case. Perram doesn't rule this out. Instead he says that other provisions of the Consumer Credit Protection Act impose penalties if lenders approve unsuitable loans as a result of the process.

So if the Westpac agent didn't accurately take into account your finances and you were entered into an unsuitable loan, you may still have a case. Banks are free to squeeze your financial comfort as they see fit, providing you stay out of hardship. The law is there for when they cross that line.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.
August 14, 2019 11.06pm

Hmmm, isn't this abdicating self-responsibility on behalf of the borrower? It may be ethically questionable, but at what point does the nanny state have to step in to decide what's best for the consumer? For example, the 'buy now pay (much much more over the long term) later' deals offered by retailers for couches and TVs and Playstations that consumers don't really need can also put someone into trouble, especially if they are on a shopping spree. And that's before we even get into the rates charged by credit card companies and their tactics to encourage you to get into debt that you can't get out of. How about we invest more as a country in a bit of simple financial education? (Although I consider it scary that someone could take out a loan of several hundred thousand dollars without considering their ability to pay it off!) It might not have been ethical of Westpac, or 'the right thing to do', but did they really break the law? (Although if I were the CEO of the bank I'd consider such loans/customers more trouble than they are worth, and take steps internally to stop such practices, regardless of the legalities).

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