Australia’s biggest home lender has made some significant adjustments to its mortgage assessment criteria, reducing its rate floor and demanding more detailed spending data.
Commonwealth Bank has decreased its floor rate to 5.75 per cent from 7.25 per cent. It has increased its interest rate buffer from 2.25 per cent to 2.5 per cent.
The bank included a detailed rundown of its home loan criteria in last week’s 2018/19 financial report. It now assesses the borrower’s ability to pay the interest rate of the loan plus the buffer of 2.50 per cent. In addition, it implements the serviceability test of a 5.75 per cent interest rate.
The borrower’s income used to assess serviceability is verified at 80 per cent or lower on unstable income sources, such as rent, and 90 per cent on tax-free income.
CBA’s retail banking services division limits rental yield to 4.8 per cent and the use of negative gearing where LVR is over 90 per cent.
The bank also revealed its focus on reducing its reliance on household expenditure measure (HEM). Instead, it will use the higher of declared expenses or HEM adjusted by income and household size.
For interest only loans, CBA will assess its borrowers on their ability to pay the principal and interest over the residual term of the loan.
Earlier in the year, APRA removed the 7 per cent interest rate floor (which in effect was 7.25 per cent) and increased the buffer to 2.5 per cent from 2.25 per cent when assessing a home loan application.
ANZ and NAB’s new floor rates are 5.50 per cent and their buffers are 2.5 per cent. Westpac is matching CBA, with a 5.75 per cent floor and a buffer of 2.5 per cent.
APRA mortgage lending rules for ADIs have been subject to constant change since the tightening of home lending requirements five years ago.
The 7 per cent rule had 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.
In March 2017, the regulator implemented limits to the flow of new interest-only lending to 30 per cent of new residential mortgages and enforced limits to loan-to-valuation ratios (LVR) above 80 per cent and asked ADIs to ensure justification for any instances of LVR over 90 per cent.
APRA started to relax the rules in April 2018 when it removed the 10 per cent investor loan benchmark but asked that ADIs keep investor loan growth under control.
Last December it removed the 30 per cent interest-only benchmark stating that the measure had served its purpose to reduce interest-only lending.
In a letter to ADIs Byers says: “In APRA’s view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending.”