Major banks have slashed tens of thousands of dollars off how much they are prepared to lend home buyers, according to new figures that highlight the toughening in mortgage lending standards.
A couple with combined income of $120,000 purchasing an investment property can now borrow up to $80,000 less from a major bank than they could a year ago, calculations from mortgage brokers found.
Tighter lending policies are also affecting owner-occupiers. The maximum loan size for the same hypothetical couple buying a home to live in, rather than an investment property, has fallen by up to $65,000, brokers says.
The sharp decline in customers “borrowing power” highlights the impact of tighter bank credit policies, which were introduced during 2015 amid regulators’ concerns that mortgage lending had become too risky.
In recent months, these tougher policies are thought to be a key reason for a sharp slowdown in the housing market, which has resulted in lower auction clearance rates and a dip in prices in Sydney and Melbourne.
To measure the impact of tougher bank lending policies, mortgage brokers calculated the borrowing power or maximum loan amount for a couple earning $60,000 each, with two children.
It calculated how much several major banks would lend the couple for investment property, and an owner-occupied home, in December 2014, compared with December 2015.
The comparison included Commonwealth Bank, National Australia Bank and Westpac. The broker was not able to access comparative figures for ANZ from 2014.
While each bank has different lending policies, the pattern is clear. The couple would have been able to borrow far more money a year ago then they can today.
Commonwealth Bank, for instance, could have lent $640,000 as a housing investment loan a year ago, compared with $560,000 now – an $80,000 reduction.
Westpac would have lent the couple buying an owner-occupied home $645,000 a year ago, but this amount has fallen to $580,000 – a $65,000 reduction.
A mortgage broker said the reduction was mainly because banks were requiring that prospective borrowers be tested against how they would cope with higher interest rates. This is despite the fact that actual interest rates being charged by banks fell over 2015.
“You’re going to have to be able to service the loan at about 7.5 to 8 per cent,” the broker says.
At the same time, banks have adopted more conservative assumptions about how much money customers will need to live on.
Previously, she said many lenders assumed certain customers had set living expenses a month. Now they are being forced to use more sophisticated indexes for measuring how much people need, and these are generally tougher.
Some banks are also taking a closer look at individuals’ specific circumstances to determine their spending patterns, after the corporate watchdog said many banks were wrongly assessing customers’ living expenses.
These tougher credit standards from banks caused the value of new housing investor lending to drop 20 per cent in the September quarter, and the share of loans going to investors was the lowest in two years.
This article first appeared in The Age, on January 5th.