New Credit Card Servicing

As of January 1st 2019, all regulated lenders will need to adopt a common approach to the method of assessing credit card commitments for loan servicing calculations.

The approach historically used by most lenders of calculating a monthly commitment based on a set percentage of the borrower’s credit limit e.g. limit of $10,000 x 3% = $300 per month will
no longer be permitted by ASIC.

Commitments must now be calculated as the amount required to fully repay the limit amount
over a three year principal and interest term. The interest rate for this calculation will be the
lower of a default rate of 22.00% p.a. or the actual highest rate that will apply to the facility.

So lets use a $10,000 credit card limit has an example - the old way of calculating this was (with most lenders) $300 per month. Now it will be calculated at approximately $382 per month.

This can prove to be the difference with an application servicing or not servicing for some.

The workaround is to simply close the credit card facility however some brokers or bankers may not provide this as a solution to customers and those it may be a case of sorry you can borrow x amount.

I think this will have lesser affect on people actually borrowing and more affect on the already fragile moral of investors and home buyers trying to enter the market.

Also like any new changes it will probably take 3-4 months before its completely realised by the end customer.

 

It also applies to the calculations for credit card facilities?

So in the past closing a card for a home loan application just meant reopening it after settlement. Now it’s a bit harder getting that credit limit back.

 

Thanks for the heads up. Do we know what was so wrong with the old method that ASIC thinks it necessary to change?
I remember the good old days when people were treated like adults and could make their own decisions about their financial risk exposure and how much credit they wanted to have access to...

 

Yes, and when some of these “adults” overcommitted and got into trouble, they ran screaming to the media that that the “greedy” bank was “irresponsible” and should never have allowed them to borrow so much!
Marg

 

Hi Rex,

This is a minor change the very broad assessment by ASIC of many things including the assessment of credit cards for servicing/borrowing capacity purposes.

This was released by ASIC on the 5th September and it was a working paper that included other aspects as well. As per the example I gave in the original post the change is a very minor one but obviously when you put it all together it has a big impact.

In all honesty I don't see an issue with how they are doing the new calculation. I also think that these changes were changes we really needed. Certainly in Sydney and Melbourne (perhaps not so much for other markets such as Perth).

The big issue originally was the delay in getting the changes (mainly the APRA changes) implemented by lenders. APRA requested lenders to make these changes ages ago but the lenders didn't prioritise the implementation so what happened was a series of sudden and knee jerk looking changes.

I probably haven't answered your question but ultimately regulators have made numerous suggestions on how banks need to calculate customers' borrowing capacities with diligence. This is on of those changes.

 

There were no such days.

There have always been limits imposed by those providing the credit (or government bodies regulating them).

If we are to support the banking system with implied and explicit government guarantees (which I don't necessarily agree with), then we need rules which will reduce the likelihood of systemic risk... something which was building with the increase in IO lending and other risky practices.

Reading the OP it sounds like a sensible measure or do you think that 3 years is not a reasonable amount of time to be able to pay down the balance of a credit card?

 

3 years sounds like a reasonable amount of time to pay off a credit card debt, I wasn't questioning that. The question I was getting at is what was the demonstrated need to move away from the old 3% rule?

My understanding is that the greatest systematic risk lies in housing debt, not so much credit cards etc. Risky growth in housing credit has well and truly been addressed by recent APRA measures (namely APG 223), to the point that things have, if anything, gone a bit too far. Why do we need to stick another boot in to households wanting to access credit?

 

Lack of decent inflation and strong wage growth is a big killer for households not having extra cash in their pocket every year.
Over time those big debts (mortgages )gets smaller and with good payrises the debt becomes easier to service which in turn helps drive the economy as wage earners have more discretionary funds available.
In an era where wage growth has stalled , it was only a matter of time that the banks had to follow and tighten up on lending.
Otherwise the risks to the banks just gets to great.

 

$5000 at 18% minimum repayment takes 33 years to pay off
Credit card calculator | ASIC's MoneySmart

 

There was a too Joseph, all you had to do was ask, I remember going to the bank about 30 years and asking for $700 K and they said why don't you take 1.5 million, though I knew I would struggle to service 700K , I also had an UNLIMITED AMX card. All I had to do was ring up the bank manager if I wanted a loan increased, and got approval instantly even on a weekend. Bank managers would also visit the properties themselves for inspection and to get the paper work signed.

 

So they would have also loaned you $10 million for a home to live in (even if you didn't have the income to service a loan that size)?

Your story is a bit meaningless without context. For example, when I owned no property in 2015 my broker provided a guide on borrowing power which was a similar range (mid $1M's), but even if I was ready with a deposit big enough I would have never borrowed anywhere near that amount. On that occasion I ended up borrowing less than a quarter of what was potentially available. That doesn't mean an unlimited quantity of credit was available to me, similarly to you 30 years ago.

 

I’m calling BS on IO lending being risky. Exactly what is risky about it? I’ve used IO loans for nearly 20 years without issue. Yes I know that you only get 5 years before a threatened reversion to P&I but I’ve always (up till now at least), been able to:
1. Negotiate an extension (another 5 years minimum) with the current lender
2. Refinance to another lender offering IO
3. Accept an offer the incumbent lender made on their own initiative for an additional 10 years of IO

Over time my loan principal has stayed the same (obviously since I’ve only been paying interest) but my LVR’s have come down from 106% and 95% to closer to 40% today.

When you think about it, the bank really does not want you to repay your loan. What are they going to do with the money? Lend it to someone else at interest is the answer. But if they leave it with me l, that’s exactly the situation they already have. Why go to the expense of finding another customer to make interest from when they already have one (me).

 

Oh yes there were. I’ve had credit cards for over 40 years and during that time had unsolicited offers from virtually all the card issuers for credit limit increases on regular occasions.

The offers initially were in the form of a letter saying ‘sign here’ and we’ll increase your limit to $x. Not content with that in subsequent years the letters changed slightly to ‘we’re going to increase your limit to $y unless you contact us to say you don’t want it’. I even received these offers (and accepted them) when I was technically unemployed (in between jobs).

And guess what? I never got over my head in credit card debt. I don’t think most people do. Sure some do. But I prefer being treated like an adult than the possible bad boy I might become if APRA don’t play their new role in the nanny state game.

 

Did you perhaps mean lack of wage growth and high inflation leave little in peoples pockets?

Had this happen to me as well, asked for a $1000 credit card limit, got $16,000.... A$#%holes.

 

A single IO loan or borrower does not cause systemic risk.

IO lending doesn't have to be risky. High LVR lending doesn't have to be risky. Low Doc lending doesn't have to be risky. Arguably, given the ideal scenario, a NINJA loan doesn't have to be risky.

However, when used en masse and in an irresponsible manner, any of these could cause systemic risk.

At the peak a few years ago IO lending was nearing some 50% of all loans being written... and that included an increasing % used by owner occupiers.

There were lenders providing new loans, while calculating serviceability of OFI debt at the actual repayment (i.e. IO loans, no buffer).

I can't quantify 'how much is too much' (identify the point where IO lending becomes a threat to the system), can you? That is why we have regulators.

I would agree with this perspective if banks were allowed to fail, not propped up by taxpayers.

Would you support the complete removal of government guarantees (explicit or implied), with banks allowed to fail taking depositors and bank share holders down with them?

If so, then I can see where you are coming from.

 

No , when I wrote "lack of" it was in reference to both wage growth and inflation.
Low and high inflation both cause their own problems

 

I think it is important to take a step back and think about general population. There is no doubt that IO loan could be an excellent tool for financially literate people or those who generally are able to use extra cash to grow their wealth.

However it is also important to understand that general population is not as financially literate as those who have been investing for a while or who invested into improving their own financial knowledge. People have been signing up for IO loans, without even understanding what 5 years IO means, and how that impacts payments down after the IO period. As we have seen from a number of ABC investigative reports.

I think we need to give regulators credit for what they do. When IO was used mainly by "sophisticated" investors, they did not step in and let the market do its thing. As soon as IO issue escalated and started to present risk they had to step in and tighten up the shop. When people start piling into any product that they don't understand, ramifications can be potentially dire for the economy.

If anything, the banks should have made sure only those who are knowledgeable get IO loans. They should have "self" regulated properly, when they dont, someone has to pick up the slack.

 

Yes fair point. I tend to think of myself as just an average joe (plenty of people have done better than me). I tend to forget that I’ve learned a lot and also the general population is not as sophisticated as the clients we work with in the buyers agency who are often high net worth individuals.