For anyone thinking of applying for a home loan, the news from the two big banks reporting their half-year results last week was bad. Lenders have spent the past couple of years tightening their lending standards, and now that arrears rates and stress levels are rising it will be even harder to get a loan.
Due to pressures from APRA and the outcome of the Royal Commission, lending criteria have changed from just having the household expenditure measure (HEM) as the main evaluator of expenses.
Banks now want to know more and take on additional investigation to achieve a broader insight into financial behaviour, increasing the hurdles that borrowers have to go through.
Apart from applying all these rigorous tests, the banks are reluctant to take risk on home loans as there is higher delinquency rates.
HEM is calculated quarterly by the Melbourne Institute of Applied Economic and Social Research and is a measure of what various types of families spend on living expenses. However, the measure isn’t a complete representation of all borrowers.
Commissioner Kenneth Hayne said in the final report: “While the HEM can have some utility when assessing serviceability — that is to say, in assessing whether a particular consumer is likely to experience substantial hardship as a result of meeting their obligation to repay a line of credit — the measure should not and cannot be used as a substitute for inquiries or verification.”
All the big banks that have reported financial results this year assess or implement the following:
- the borrower’s ability to pay the interest rate floor at 7.25 per cent;
- interest only loans on the full remaining principle and interest term;
- the higher of declared expenses or HEM adjusted by income and household size;
- 20 per cent cap of on less stable income sources like rent or bonuses; and
- ability to pay an increased minimum monthly credit card expense.
In addition to the stringent lending requirements, ANZ introduced a loan-to-value ratio cap of 70 per cent in high risk mining towns and reduced to 90 per cent for all investment loans.
NAB has other specific requirements for lending such as lender mortgage insurance for over 70 per cent of loan-to-value ratio in inner city investment housing as they see it as a riskier loan.
ANZ tried to adapt to these changes in assessment criteria in its operations and change their strategy towards interest only and investment loans but made mistakes in the process.
The bank’s chief executive Shayne Elliot said in the half-year results presentation: “We have tightened our standards with the change in definitions of responsible lending but we could’ve done these things in a more reasonable and balanced way.”
According to the bank, while trying to automate their processes it put stress on their systems, staff and customers and requires an entire reengineering in the long term.
ANZ’s group executive for retail and commercial banking Mark Hand said: “It is harder and it takes longer to get a loan. That makes our proposition a little bit less attractive.”
ANZ experienced a sharp decrease in their interest-only portfolio with 18 per cent compared to 26 per cent last year and investor loans dropping from 32 per cent to 31 per cent.
The owner occupier loans have a slight increase since the same time last year at 66 per cent from 65 per cent. Moreover mortgage delinquencies have become an increasing problem for the bank now reaching around two per cent.
Elliot said: “We saw 500 or 600 families in this half get themselves into difficulties in terms of not being able to keep up with their payments.”
Furthermore, 5 per cent of its home loans were in negative equity as at March 31, skewed mainly to the mining states.
Last week NAB reported in their half-year results that their use of HEM dropped from 41 per cent to 32 per cent.
It reported an increase in home loan arrears due to the interest only loans converting to principal and interest and an increasing number of loans in arrears for over 90 days.
The owner occupier loans increased six basis points from last year to 59.7 per cent and interest only loans decreased substantially from 27 per cent in 2018 to 22.4 per cent this year.
The delinquency rate is currently over 0.8 per cent for 90 days past due and borrowers are staying in arrears for longer.
NAB’s chief financial officer Gary Lennon said: “We had higher mortgage delinquencies and a general increase in consumers under stress and we have also seen that consumers are in arrears for longer.”
The bank announced more dismal results with just over three per cent of its borrowers have loan-to-value ratios of 90 per cent meaning they hold only 10 per cent of equity in their property.
Earlier this year Commonwealth Bank revealed in its half-year results an increase in mortgage delinquencies at around 0.7 per cent from around 0.6 the previous year.
CBA’s share of the home loan market decreased slightly to 24.3 per cent from 24.6 per cent the previous year.
