Among the myriad of changes happening in the lending landscape at present, there is one that is likely to change the goal posts quite dramatically. I’m talking about the move to an open banking system, which means that the days of hiding your bad money habits may be a thing of the past.
In a nutshell, open banking means lenders have more insights about your finances if you agree to share the information with them.
Proponents of the system say it will give borrowers more control and negotiating power as there will no longer be a one-size-fits-all lending approach.
Detractors, on the other hand, believe it may be detrimental to borrowers deemed “high risk” because of previous money issues such as late bill payments.
However, it’s important to factor in the changes to serviceability criteria recently announced by APRA, which will benefit all borrowers.
That said, an open banking system will enable lenders to see your credit behaviour in black and white.
They will know if you make your credit card repayments on time each month and whether you are habitually late paying bills such as your mobile phone or council rates.
Lenders will be looking for patterns of behaviour, which they will then use as a determinant in your loan application.
Such as, if you always pay your bills on time, then you are likely to be assessed as “low risk” and offered a lower interest rate on your loan.
However, if you tend to be a bit forgetful come bill payment time, or you regularly have cash flow problems, your “high risk” rating will come with it a higher interest rate.
They may even go through your transactions line by line and deem that you regularly overspend, which requires a cash transfer each month from a line of credit, for example.
An open banking system will mean your interest rate will be tied to your individual credit behaviour as well as your ability to service the loan.
Ultimately, the system will create individualised interest rates for loans rather than the one interest rate per loan product that is common today.
One of the main questions I’ve been asked about the open banking system is how far back lenders will go into your personal finances.
The answer is, well, it depends.
If you are a first-time property buyer, they may investigate your accounts for the past two years to get a clearer picture of your cash flow and bill management.
However, if you already have a property loan or two, and therefore have finance runs on the board, they probably won’t dig around as much.
There are some borrowers who are likely to feel the heat more than others, though, such as the self-employed and those with a high loan-to-value ratio that requires lenders mortgage insurance.
They may also take a closer look at people whose credit behaviour has changed over recent times, such as buying a number of investment properties rapidly.
Anyone who is also refinancing regularly just to keep up with bills will also be red-flagged.
The open banking system begins at the start of next month, so it’s vital that borrowers understand it sooner rather than later – although it will take time to have an impact on the lending environment more generally.
The easiest way to circumvent any negative fallout is to simply ensure you pay your bills on time.
Of course, sometimes you may forget once or twice, and that is all right because lenders are looking for regular patterns of bad money management rather than random occurrences of overdue accounts.
Setting up automated payments is the simplest way to ensure your bills are always paid on time, which will be a big tick of approval from lenders.
Another strategy is to schedule a dedicated day to pay bills, such as every week or every fortnight, depending on when you are paid.
Using either one of these simple approaches will ensure that your loan application is going to rise to the top – rather than languish at the bottom of a lending “too hard basket”.