The Financial Services Royal Commission is currently underway and while the final recommendations are not due until early 2019, there are some likely outcomes that will have a significant impact on how much you pay on your mortgage and how much you can borrow.

Greater costs to the banks will be passed on to home loan customers

Early on in the Royal Commission it became clear that there were significant amounts of rogue behaviour occurring in the banking sector. The result of this is that banks are going to need more people to monitor what goes on within banks to ensure that going forward, this behaviour is minimised.

It is also likely that banks will be required to do more reporting to regulators such as the Australian Securities and Investments Commission (ASIC), which will again require more people.

While these moves are warranted, it will mean greater costs to banks and these are likely to be passed on to Australians, including home loan customers.

Less competition means more expensive home loans

Large banks are profitable and therefore likely to be able to more easily absorb additional costs than smaller lenders. With additional costs of monitoring and reporting, it may mean that smaller operators find it harder to operate competitively in the home loan sector.

And although there is still very little fintech startup activity in the home loan space, strong growth in the sector will also be curtailed by these additional requirements. Less competition gives larger players more market power and will mean they have the ability to charge more for home loans

It will be harder to get a loan

Throughout the royal commission, it became apparent that many financial institutions were not making reasonable inquiries into borrower’s financial commitments. Already, a greater focus on expenses and spending behaviour will be undertaken to ensure repayments can be made.

Home loan applicants at Westpac (inclusive of Bank of Melbourne, BankSA and St George Bank) will now have to reveal everything from pet care to tax and toiletries, under a tough new "responsible lending" regime. The nation's second largest lender, which includes Bank of Melbourne, BankSA and St George Bank, will deeply drill into borrowers' income and spending to better understand their living expenses, commitments, capacity to repay and verify documents. For example, it will require evidence of typical supermarket spending for groceries, including food and toiletries. One can only reasonably assume the only way they can determine that is reviewing your most recent bank statements. Which, among other things, will indicate to the lender your weekly spend on alcohol, whether you like the odd flutter on the pokies/lottery tickets and of most interest to the banks; whether your asset and liability statement has truly revealed all your existing debt. 

The group has recently appointed Equifax, Experian and illion, which is formerly Dun and Bradstreet Australia and New Zealand, some of the world's major providers of credit reports and credit scores, to help screen applications in response to government and regulatory pressure to boost loan scrutiny.

More stringent bank lending policies are certainly continuing to hold down the Melbourne auction clearance rate, which fell to 61.3 per cent on Saturday. This preliminary clearance rate was down on last weekend’s 62.5 per cent, a figure that was revised to a buyer-favouring level of 57.3 per cent during last week.

Veteran RT selling agent Simon Derham said buyers are already greatly affected by the reduced amounts of money that lenders allow them to borrow. As a result, they are lowering the sums they are prepared to bid at auctions and are demanding that quotes reflect fair value. 

Home loan rates are slowly edging up and it is expected that further increases will occur over the next 12 months. Even without the royal commission, your home loan is going to get more expensive.

If you already have a loan, now is the time to pay a bit extra to ensure you are well placed when it does become more expensive. If you are looking to get a loan, keeping a good record of your spending will ensure a more seamless home loan process.