Australian mortgage reform 'pale reflection' of UK's

by Calida Smylie27 Feb 2014
Australia should be looking to the UK to see how to get mortgage reforms right, the head of a finance consulting firm has said.

Digital Finance Analytics principal Martin North wrote a blog post on his company’s website saying there is “substantial opportunity” for further reform in the Australian mortgage industry and given the current state of the market, it is overdue.

“The point I want to make is that the Australian assessment is a pale reflection of the proposals being introduced in the UK. I believe we should be moving to tighter affordability assessments in Australia, and that ASIC should revise the ‘not unsuitable’ guidelines to more closely match the UK proposals,” he said.

The UK held a review into the mortgage industry as a response to the GFC, and subsequently has some significant changes – to how mortgages are sold, consumer disclosure and protection, non-standard mortgages and prudential regulation – coming in on 26 April.

“The stunning change is that lenders cannot pass responsibility off to a broker. They are full responsible for assessing whether the customer can afford the loan. This is going to require significant additional analysis, according to industry analysts,” North said.

This is a more rigorous requirement than currently exists in Australia, where the obligation of lenders and brokers is to ensure the loan is ‘not unsuitable’, he said.

“In fact banks are using the HIA-CBA Housing Affordability Index which compares the level of monthly mortgage repayments on a median-priced property purchased now with average weekly earnings.

“The index does so at current interest rates, which of course are very low at the moment. The data driving it though relates to property in the CBA portfolio only.”

The UK proposal to put the final responsibility on the lender should be welcomed, as it removes some of the complexity in the relationship between the customer, lender and broker, North said. “We should do the same.”

He also believes Australia should follow the UK changes to brokers’ commissions; "where brokers are now either identified as tied or all-of-market advisers, and cannot receive commissions because of the conflict involved".

The UK mortgage reforms
For lenders the main changes are:
  • Lenders will be fully responsible for assessing whether the customer can afford the loan, and they will have to verify the customer’s income. They can still choose to use intermediaries in this process, but lenders will remain responsible.
  • Lenders will still be allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
  • There are transitional provisions in the MMR that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan.  The borrowing will not be able to exceed the amount of their current loan, unless funding is required for essential repairs.  The decision on whether or not to lend in these cases will remain with the lender.
For brokers the main changes are:
  • The removal of the requirement on intermediaries to assess affordability.
  • The removal of the non-advised sales process.
  • Most interactive sales (e.g. face to face or telephone) to be advised.
  • An ‘execution only’ sales process for non-interactive sales (internet and postal).
  • Every seller required to hold a relevant mortgage qualification.
  • It will no longer be compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they want to). Instead, certain key messages about a firm’s service must be given to customers.
  • The Key Facts Illustration will not have to be given every time the firm provides the customer with information about a product that is specific to them. Instead, it will only be required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want in an execution-only sale.


  • by Again... 27/02/2014 10:40:39 AM

    Given the Australian financial system was one of the few - if only - to survive 2007; it then seems appropriate that we change it to match all the countries whose systems didn't work?
    And yes that is irony...

    To sum up his article; "let's take lessons from the losers".

  • by TomTom 27/02/2014 11:45:19 AM

    I like the idea but I can see the commissions from banks dropping as a result. This industry is already painful enough to operate in.

  • by Greg of Perth 27/02/2014 12:11:12 PM

    Lenders in Australia approve all Housing loan Applications, I don't know of any that abrogate their responsibilities to third parties.
    In the USA prior to the GFC (ironically started there) lenders the likes of IndyMac Bank did just that. Allowed Brokers to not only approve but document those approvals and then Fund the loan only later passing the file to the Lender.
    As a result, IndyMac no longer exists....Lessons to be learned here --clearly Yes?