What loans fall under the NCCP Act?

A lot of people are confusing recent media regarding APRA & investment lending rules with the NCCP Act.

This is a handy guide regarding loans for personal, investment and business purposes & how the credit legislation affects their respective loan approval criteria and compliance requirements.

NB: This is a guide only and does not purport to be definitive or provide advice.

Jump to section:

What is the NCCP Act?

Which loans are captured under the NCCP Act

I’ve seen a lot of press about investment lending being penalised, is this the same thing?

How does this impact on the process of applying for a loan?

What does ‘not unsuitable’ mean?

Can’t Naritas just tell me which loan is best?

Can’t Naritas just give me an indication of the interest rate?

What does this mean for low doc loans covered by the NCCP Act?

Do ‘no doc’ loans still exist?

 

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What is the NCCP Act?

  • The National Consumer Credit Protection Act, or NCCP, is legislation that’s designed to protect consumers & ensure ethical & professional standards in the finance industry, through the National Credit Code (NCC).
  • The Act is regulated & enforced by ASIC.
  • The Act provides that all lenders & credit advisers are required to hold a credit license or be registered as an authorised credit representative.

Loans are captured by the NCCP Act when:

  • A security property is owned in the name of one or more natural persons or strata corporation, AND
  • The finance is being provided wholly or predominantly for:
    • Personal, domestic or household purposes; or
    • To purchase, renovate or improve residential property for owner occupation or investment purposes; or
    • To refinance credit that was previously provided wholly or predominantly to purchase, renovate or improve residential property for owner occupation investment purposes.

Loans NOT captured by the NCCP Act:

  • The security property is wholly or predominantly non-residential in nature such as a shop, industrial unit or office (Note: where any part of a property is used for residential purposes, it must comprise less than 50% of the value of the overall property).
  • Where a residential property is owned by a company or trust with a corporate trustee.
  • Unsecured loans, where the applicant is a corporate entity and the loan purpose relates to commercial or business purposes.

In summary, the NCCP Act will capture all borrowings where the security property is wholly or predominantly used for residential purposes and the ownership of the property is in the name of a natural person or persons.

For example, this will include the following properties where the ownership is in personal names:

  • Owner-occupied home
  • Investment house or unit
  • Multiple units in one residential block
  • Student accommodation
  • Boarding house
  • Bed & breakfasts
  • Mixed use retail & residential where the residential value is greater than 50% of the overall value
  • Please also note the NCCP may extend to include loans where the borrower is a company or trust but the security property is owned in the names of individuals and is used wholly or predominantly for residential purposes

The NCCP Act does not extend to commercial and business borrowers who are borrowing exclusively for business purposes where there is no collateral, or the collateral is owned by a business entity.

 

I’ve seen a lot of press about investment lending being penalised, is this the same thing?

Not exactly. Home loan discounts and incentives for loans related to personal purposes have come from recent APRA initiated lending reforms. Investment lending is typically covered by the NCCP Act (as are owner occupied loans).

The critical difference in determining whether a lender will treat your loan as an investment loan is the loan purpose. If the loan is predominately for personal purposes you will likely qualify for the discount.

Examples of personal use include buying a residence for owner occupation, completing home improvements on an owner occupied property, buying a motor vehicle or a boat for personal use.

Investment purposes generally relate to uses of funds which generate an income.

 

How does this impact on the process of applying for a loan?

When you apply for a loan with a credit adviser, they’ll follow the specific process that has been set out in the Act.

  1. Make enquiries: Your credit adviser must make reasonable enquiries as to your financial position, requirements & objectives.
  2. Verification: Your credit adviser must take reasonable steps to verify your financial position.
  3. Preliminary assessment: With the information gathered from steps one and two, your credit adviser must make a preliminary assessment as to which loan(s) are appropriate for you, before recommending them to you.

The lender is required to make a final assessment using a similar process to the credit adviser. They don’t normally provide this assessment to you as part of their process, however you can request a copy by contacting your lender.

 

What does ‘not unsuitable’ mean?

Your credit adviser and lender are required by the NCCP act to provide you with a loan that is not unsuitable.

ASIC deems a loan to be unsuitable if:

  • You may be unable to meet the loan repayments, or may only be able to meet them with substantial hardship; or
  • The loan does not meet your requirements or objectives.

Examples of your requirements might be a fixed interest rate or an interest only period. Your objectives might be to buy a home or borrow enough money to consolidate your debts.

Naritas uses your specific budget and various measures such as indexes (for example the HEM) to assess your ability to repay a debt. The lender’s borrowing power calculator (serviceability calculator) will also assess your ability to repay the debt without hardship.

The term “not unsuitable” was chosen because this puts the responsibility onto the customer to prove that the loan was suitable rather than onto the lender to prove that the loan was suitable.

 

Can’t Naritas just tell me which loan is best?

The rules associated with the NCCP form part of the reason why we spend so much time and effort getting to know you and your financial position before we start organising or enquiring into loans. In order to behave responsibly and make a reasonable assessment about whether or not a loan product is suitable for you, we need to fully understand your personal circumstances and financial position.

We often receive enquiries from people who would just like to know the best interest rate available today. Unfortunately, the rules of NCCP mean that giving such a quote would be irresponsible – and most likely inaccurate. It’s not until we’ve made enquiries into your personal circumstances and financial position that we can put together a selection of appropriate loans and help you choose the most advantageous interest rate from amongst them.

 

Can’t Naritas just give me an indication of the interest rate?

Yes, we can give you an indication of the interest rate and the details of likely lender fees. We normally give you a range, as we can’t confirm immediately which lenders you’ll qualify for a loan with.

For an indication of home loan interest rates, refer here.

For an indication of commercial loan interest rates, refer here.

For an indication of commercial leasing interest rates, refer here.

For an indication of personal loan interest rates, refer here.

 

What does this mean for low doc loans covered by the NCCP Act?

Lenders and credit advisers are required to take reasonable steps to verify your financial position. This is at odds with the concept of a low doc loan where you don’t need to provide evidence of your income. To get around this problem, lenders have come up with “alternative verification” methods.

By providing some documents as evidence of your income, lenders can fulfil their obligations under the NCCP Act, without requiring your tax returns and financial statements.

The most common documents that lenders ask for are:

  • BAS statements: A lender may ask for 12 months’ BAS statements to verify your turnover and estimate your income.
  • Trading statements: A lender may ask for 6 months bank account statements from your business, to verify your turnover and estimate your income.
  • Accountant’s letter: A lender may have a specific accountant’s letter template for your accountant to sign, confirming your income.

The old style low doc loans where only an income declaration was required are effectively gone. The only exceptions to this are the unregulated mortgages available from specialist lenders.

 

Do no doc loans still exist?

No doc loans don’t require any evidence of your income and, in some cases, don’t require you to sign an income declaration. They don’t meet the requirements of the NCCP Act and as such, are only available from a few select lenders who offer unregulated loans.

For your loan to be unregulated it must be either:

  • For investment in commercial real estate,
  • For investment in shares,
  • For investment in a business, or
  • In the name of a company / trust structure.

If your loan is regulated under the NCCP act then you can’t apply for a no doc loan. You must meet the above criteria or one that’s likely to be unregulated and then you can qualify for a no doc loan.

Please note that the interest rates and fees for no doc loans are significantly higher than those of normal mortgages.