The move by the banking regulator last week to withdraw the requirement that lenders apply a 7.25 per cent floor rate when assessing a loan applicant’s mortgage serviceability has been welcomed by some commentators as a change that will allow many home buyers to borrow more and others, who might otherwise have been excluded, to get into the market. Don’t be so sure.
The regulator has relaxed one constraint in the credit assessment process but the loan underwriting standards continue to evolve and, in most cases, things continue to get tighter.
The Australian Prudential Regulation Authority says that instead of a 7 per cent floor (which is 7.25 per cent in practice), banks and other regulated lenders will be allowed to review and set their own minimum interest rate floor for use in assessments.
At the same time, APRA wants lenders to increase the interest rate buffers they use in their assessments from 2.25 per cent to 2.5 per cent.
The 7 per cent rule has been in place since December 2014, when APRA also introduced the interest rate buffer and the 10 per cent limit on growth in new lending to investors. And in 2017, it told ADIs to limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending.
Last year APRA started to ease the restraints. It removed the investor loan growth benchmark in April, and in December it removed the interest-only benchmark (with effect from 1 January).
APRA chair Wayne Byres said: “With interest rates at record lows and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal and interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have substantially reduced.”
In response to the latest change, CoreLogic research analyst Cameron Kusher said the likely impact would be that more people would be able to get a mortgage.
Customer Owned Banking Association chief executive Michael Lawrence said more Australians would be able to borrow from ADIs. This would improve competition by reducing the advantage currently enjoyed by non-ADIs.
RateCity research director Sally Tindall said the change could be a “game changer” for a lot of potential property buyers who have not been able to get their loan applications over the line.
These positive views ignore the bigger picture. Included in their recent half-year financial reports, three of the big banks detailed some of the changes to lending standards they have made over the past couple of years – all of them more restrictive.
ANZ. In 2016 the bank introduced a 20 per cent “haircut” for overtime and commission income, and it increased the income discount factor for residential rental income from 20 per cent to 25 per cent. It said it would only allow “limited acceptance” of foreign income.
In 2017, it restricted new housing lending to a maximum of 80 per cent LVR for all apartments within seven inner city Brisbane postcodes. A similar restriction was imposed for inner city Perth suburbs.
Westpac. In 2016 the bank stopped non-resident lending, and for Australian and New Zealand citizens and permanent visa holders using foreign income it tightened verification and restricted LVR to 70 per cent.
Last year, it introduced “more granular assessment” of expenses, with 13 categories to capture living expenses and other commitments. The income verification requirements for self-employed applicants was strengthened. Non-base income (rent, annuities) was “shaded” by 20 percent.
NAB The bank says apartments must be a minimum of 50 square metres before it will lend on them.
It applies a 70 per cent LVR limit to “high risk” postcodes, such as mining towns, and an 80 per cent LVR limit for owner occupier interest-only mortgages.
Last year, it tightened assessment of customer credit cards, assuming repayments of 3.8 per cent of the limit each month.
UBS economist George Tharenou says the latest APRA change will notionally increase borrowing capacity by around 8 per cent, but a move to full verification of living expenses could offset APRA’s easing.
UBS has also pointed to the Government’s insistence that the big banks start using the comprehensive credit reporting system as another change that will have a significant impact.
CCR will add credit card limit details to credit reports and banks will have to add an assessment of the consumer’s ability to repay their credit limit over three years, when they assess a home loan application.
UBS says that when banks add that calculation it will reduce home loan borrowing capacity significantly.
Another change in the works is that APRA wants lenders to apply maximum debt-to-income limits. It wants lenders to set limits on the amount of lending at high debt-to-income levels. Any household with debt six times income, or more, would be in that category.
UBS cites HILDA data, which suggests that currently one-third of households have a DTI of 6 times or more. APRA wants no more than 10 per cent to be 6 times.