When Commonwealth Bank released its half-year financial report last week, it included an update on its mortgage lending practices. For anyone about to apply for a home loan, it is essential reading.
Since 2015 the bank has made a number of changes to its loan underwriting process. The changes include:
- increased serviceability buffers on income and debt;
- limits on lending in high-risk areas and to non-residents;
- loan-to-valuation ratio limits on interest-only and investment loans;
- interest-only terms limited to five years;
- withdrawal of low doc loans from sale;
- limits on high debt-to-income ratios;
- the introduction of new data-driven liability verification tools, including comprehensive credit reporting.
When assessing serviceability, the bank uses the following criteria:
Income: all income is verified; less stable income, such as rent and bonuses, is discounted to 80 per cent or less; limits are placed on investment income (for example, rental yield is capped at 4.8 per cent)
Living expenses: living expenses are captured for all customers.
Interest rates: the bank assesses a customer’s ability to pay based on a buffer of 2.25 per cent (that is, if rates go up by 2.25 per cent can the borrower still pay) or the minimum interest rate floor of 7.25 per cent; interest-only loan applications are assessed on a principal and interest basis.
Existing debt: the bank reviews transaction statements to identify all debts; transaction account data is reviewed to identify all other obligations.
CBA chief executive Matt Comyn says: “For customers there has been a lot more inquiry into expenditure and more rigorous assessments.”
Over the past two years applications for interest-only loans have been flat and investor applications have fallen 25 to 30 per cent. “That is what you would expect,” he says.
However, he stressed that there was no less supply, borrowing capacity had not changed much, approval rates were about the same, time to decision was down a little and loan sizes were up.
From the bank’s perspective, availability of credit is not a constraint.
Borrowing capacity fell by as much as 10 per cent during 2016 for some groups of borrowers but has been stable over the past year. “In any case, few borrowers borrow at capacity,” Comyn says.
Despite the fall in house prices over the past year, the average loan-to-valuation ratio of the mortgage portfolio has only risen from 50 per cent to 51 per cent.
Borrowers have big payment buffers in place. Thirty-one per cent of home loan accounts have more than two years of payments in advance.