The Royal Commission, which was established last December 2017, conducted enquiries into the practices of banks, insurers and other financial institutions all throughout 2018. The government’s decision to pursue an enquiry came after a series of scandals which included forgeries of signatures, sketchy financial advice that resulted into millions of losses, and some breaches by banks in responsible lending obligations.
The enquiry has resulted in the tightening of lending processes. Some say that it will affect the demand for property, especially small units that mostly appeal to investors.
How will the Royal Commission affect your mortgage? Read on to find out how and what you should expect after the Royal Commission.
It may affect the bank’s borrowing costs.
For banks to lend you money, they also borrow large sums of money overseas from global investors. The Royal Commission will make Australian banks look more like a risky investment to global investors. They can suspend an investment they have or are planning to have in Australia. Another possibility is that they will put a premium on the amount that they are lending to Australian banks. This will then result to the next item.
Interest rates may go up.
Yes, your mortgage may go up as a result of the Royal Commission. Aside from an increase in Australian banks’ borrowing costs, the Royal Commission will also result in banks doing more monitoring on their end to ensure that unethical acts and behaviours are minimised. This means additional manpower will be needed for monitoring.
Regulators may also require more reports and data from banks, which again, will need additional manpower to be done.
These additional operational costs will likely be passed to customers, including home loan customers.
Lesser competition, more expensive home loans.
With the additional operating costs on banks, smaller operators may find it hard to operate, especially in the housing loan sector. Large and profitable banks, on the other hand, can quickly absorb the additional costs. This will result in fewer options in the market, and lesser competition. This gives the remaining players in the housing loan sector more power, where they can increase their charges for home loans.
It will be more challenging to get a loan.
The Royal Commission is expected to result in stricter process and requirement on home loans. One of the findings during the enquiry is that banks and financial institutions are not making reasonable enquiries into the borrower’s financial capacity to pay. Aside from income, expenses and spending habits will also come into focus. This will give banks a better understanding of the customer’s financial commitments and his capacity to pay. This can mean more documents required when applying for housing loans.
If you have an existing home loan, it will be prudent to start paying a little extra on top of your monthly mortgage. It can help you be in a better financial place once mortgages and interest rates start going up.