Investment is not a personal purpose
The Code’s purpose test, in section 5, looks for credit provided for personal, domestic or household purposes. Section 5(3) closes one door in a single sentence: “For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.”
ASIC’s licensing guide then opens one back. It says that where credit is provided wholly or predominantly for business or investment purposes, the Code will not apply, and it excepts “investment in residential property” from that. So investment credit divides in two, and the dividing question is what the investment is.
Residential property as an investment
ASIC’s responsible lending guide lists residential investment loans among the regulated products, and describes the regulated purposes as including “the purchase or improvement of residential investment property”.
Shares and managed investment schemes
ASIC says a consumer’s borrowing to invest, for example in shares or in managed investment schemes, generally falls outside the Code unless the investment is residential property.
The wording differs between ASIC’s guides: one speaks of investment in residential property, the other of buying or improving residential investment property. The Code’s section 5(1)(b) is narrower than the first and wider than the second: it covers credit provided “wholly or predominantly” for either of two purposes: “to purchase, renovate or improve residential property for investment purposes”, or “to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes”.
What follows a residential investment loan inside the line
Once credit is on the Code’s side, it carries the consumer regime’s obligations with it. The security goes with it as well: the Code applies to a mortgage that secures obligations under a credit contract where the mortgagor is a natural person or a strata corporation.
| Obligation | What the source says |
|---|---|
| Responsible lending | ASIC’s guide says the obligations apply to credit products for personal, domestic and household purposes or for buying or improving residential investment property, and names residential investment loans among them. |
| Inquiries before lending | For a regulated product, ASIC’s guide says the National Credit Act requires reasonable inquiries about the consumer’s requirements and objectives and about their financial situation, and reasonable steps to verify that financial situation. Those inquiries must fall within 90 days before the assessment, or 120 days for a home loan, a longer period the regulations prescribe for home loans only for credit providers. |
| A mortgage broker’s best interests duty | ASIC says the best interests obligations apply only to regulated credit products, which it describes as those for personal, domestic or household purposes or for buying or improving residential investment property. |
| A default notice before enforcement | ASIC’s complaints guide says a credit provider must give a borrower a default notice before starting enforcement proceedings, citing section 88 of the Code. Section 88 itself requires a notice allowing at least 30 days from its date to remedy the default, and lists cases where no notice, or no wait, is needed. |
Where the exception stops
The exception is for residential property. ASIC’s licensing guide frames shares and interests in managed investment schemes as examples of investment credit that is generally not covered, so a loan for those generally sits on the far side of the line, with business credit. The Code also names one kind of investment credit outright, the margin loan, and the Corporations Act gives margin loans their own lending rule; both are in what the Code leaves out.
ASIC’s licensing guide uses the same words, “wholly or predominantly”, for investment that it uses for business. So a loan that is partly for investment is measured the same way as any other mixed loan, by the more-than-half test explained in personal or business purpose. What the business side of the line offers instead is set out in what a business borrower has instead.
Two cautions Moneysmart gives about investment property loans
Moneysmart’s page on buying an investment property is not about the Code’s line, but it adds two points worth setting beside it, here in plain words.
- Many people buy investment property with interest-only loans. Moneysmart points out that the interest-only period ends after a set time, and the repayments then rise to cover the amount borrowed as well as the interest.
- Moneysmart says to be wary of property investment advice from groups of service providers, because developers, accountants, lawyers and mortgage brokers might recommend one another’s services.
The five guides
- Personal or business purpose
- What a business borrower has instead
- Investment and the Code’s line (this guide)
- Disputes for a small business borrower
- What the Code leaves out