The fallout from the Banking Royal Commission is reverberating across the economy. Banks are simplifying their business models, cutting costs and tightening their lending practices. Boards are streamlining their product offerings in the wake of some pretty astounding findings by the Commission.
The impact of the Banking Royal Commission is not only being felt by banks. The property markets continue to fall as banks limit borrowings as a result of APRA’s 2017 changes to regulatory requirements. The two-pronged hit of stricter lending criteria and a cooling housing market has led many to raise concerns over a further downturn, which then further impacts the banks willingness to lend. These tighter lending practices, coupled with the findings of the Royal Commission and the criticisms directed at ASIC has eroded trust in the big banks in particular and this paves the way for smaller banks and other institution to increase market share.
From a borrower’s perspective, banks are already being much more vigilant in assessing your ability to service the loan, as well as requiring lower loan to value ratios. This means they want to make sure that you have the capacity to make repayments both at the current interest rate and in the event of several rate rises over the course of the loan. A home loan may currently be tested at 8% and a business loan fractionally higher at 9%.
Banks often use their own methodology to determine your living expenses. No matter how frugal you know you are, the banks can make living expenses assumptions that may be significantly more than what you actually spend. Banks require much more substantive documentation in support of loan applications and are taking longer to critically evaluate and check the documentation.
Predictions are that the housing market still has some way to fall and this, combined with other factors such as the ongoing reset for interest-only loans, negligible wage growth, rising personal living costs, rising bank funding costs and negative gearing changes under a possible Labor government, are likely to make it harder to access finance.
Small to medium sized businesses (SMEs) are also feeling the effects of the Royal Commission as banks are more risk aware than ever. They are taking longer to make a loan decision and as they seek to maintain their earnings margins, fees are likely to increase.
The ABA’s revised Code of Banking Practise will be mandatory from July 1 2019 and that will certainly impact bank lending practises to SMEs. The revised Code applies to all consumers and to small businesses borrowing up to $3m and replaces the previous version, The Code of Banking Practice 2013 The changes will make banking products more transparent but also requires banks to be more ‘responsible’ in terms of lending.
There are a range of non-bank lenders who may enter the market as the fallout from the Royal Commission is properly evaluated and actioned and the new code comes into effect. These include challenger banks, fintechs, specialist asset financiers and merchant cash advance lenders. These lenders tend to be more flexible but it’s still important that you don’t commit to unrealistic repayments.
BDH Leaders can help you navigate financing options in the post Banking Royal Commission landscape. Contact us for expert advice.