Caviar and wine, anyone? What a court ruling means for you

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Indulgences such as caviar, wagyu beef and the finest bottles of wine shouldn’t count against you when lenders assess your application for finance, a Federal Court judge has said.

Ok, so maybe Federal Court Justice Nye Perram has a slightly different grocery list to the rest of us.  But his recent judgement should be welcome news to potential borrowers who have splashed out on the odd luxury over the past six months and are worried that it would completely derail their loan application.

So what’s going on?

Well, the corporate watchdog (the Australian Securities and Investments Commission, aka ASIC) filed a court case against Westpac in 2017 in an attempt to strengthen lending standards.
ASIC argued that Westpac’s automated decision system relied solely on a household expenses benchmark that underestimated real living expenses and, as such, was flawed.
However, Justice Perram ruled that Westpac had done nothing wrong by using its automated system, rather than manually checking the borrowers’ living expenses, when approving more than 260,000 home loans between December 2011 and March 2015.

A tasty morsel from the judgement

Justice Perram said that current laws do not explicitly require banks to check expenses.
“[I’m] unable to discern why, as a matter of principle, the consumer’s declared living expenses must be considered,” he said.
“I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.
“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship.”
Basically, what Justice Perram is saying is that just because you fork out for expensive items before you apply for a mortgage, doesn’t mean you’re incapable of reducing your expenses once you’ve taken out a loan.

What happened next?

The Australian Financial Review (AFR) followed up on the decision with a scathing smackdown of ASIC in an editorial that asked: “why did ASIC even bother?”.
“Leave banks – the institutions with the expertise and incentive to write good loans – to assess risks for home loans. Not second-guessing bureaucrats,” the editorial stated.
“After all, it is hardly in a bank’s own interest to lend to people who are unlikely to be able to pay the money back.”
CoreLogic Research Analyst Cameron Kusher meanwhile wrote that it was not only a big win for Westpac, but the entire lending industry.
“The judge in the ASIC/Westpac case seems to really get it. While you might spend a lot more before you get a mortgage, getting a loan is about knowing someone has the capacity to change their spending behaviour once they have a mortgage,” he said.
“Lending has become so prescriptive when it is really the unexpected life events that cause someone to default on their mortgage. You can’t foresee everything.”
Meanwhile, ASIC commissioner Sean Hughes said the commission was consulting on new guidance in relation to responsible lending obligations.

What this means for your next loan application

Westpac says the decision provides clarity for the interpretation of responsible lending obligations, however consumer groups who found the decision “disappointing” are calling on the government to amend responsible lending laws.
While this court ruling may have the potential to somewhat relax the tight lending standards currently in place, it’s better to be safe than sorry when applying for a loan and make sure to keep reading up on how other micro-transactions could impact your overall living expenses.
After all, it is still up to the lender’s discretion (perhaps hold off on the caviar for a while longer!).
So if you’re considering applying for finance, you should check out our Well Balanced home loan product.

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