Australian banks are making changes that could make it even harder for homebuyers struggling to enter the market.
Home buyers may find it even harder to get a loan as rising interest rates are pushing Australia’s major banks to tighten their lending standards.
ANZ has confirmed that it will only accept home loan applications if the debt-to-income ratio is below 7.5, meaning customers cannot borrow that much. It said it had made the decision, which will take effect from June 6, “given the changing” interest surroundings”.
“ANZ regularly reviews credit needs and policies as the economic environment changes to ensure we continue to lend cautiously to our customers,” said an ANZ spokesperson.
The debt-to-income ratio calculates a person’s total monthly debts and divides it by their monthly income.
ANZ’s move follows National Australia Bank’s decision to lower its debt-to-income ratio cap from nine times to eight times, although NAB will still consider borrowing at higher levels if credit checks for individual customers are positive .
“NAB will continue to put responsible lending at the forefront of its approach to credit and we welcome ongoing discussions with regulators,” said NAB Director Kirsten Piper.
Other banks say they will also look more closely at loans with a higher debt-to-income ratio (DTI).
A Commonwealth Bank spokesman said it is applying stricter lending parameters for loans with a debt-to-income ratio of more than six times and where the customer had a small down payment.
Westpac said loans with a DTI of seven times or more were automatically sent to the credit team for manual review.
“The DTI ratio is one of many considerations when assessing home loan applications,” a spokeswoman said. “We also rate borrowers at a higher interest rate than their original rate to ensure they can accommodate future changes in interest rates.”
The Australian Prudential Regulation Authority (APRA) considers a DTI of more than six times potentially higher risk, as do interest-only loans and loans approved with a down payment of less than 10 percent.
Last October, APRA noted that household debt-to-income was very high — both historically and internationally — due in part to very low interest rates and rapidly rising real estate prices.
It said household credit growth is likely to exceed income growth for the foreseeable future, further raising debt levels.
APRA said all financial institutions should operate with a buffer of at least 3.0 percentage points over loan rates.
It will also consider the need for “further macroprudential measures” if lending at high debt-to-income ratios were to continue to grow.
However, banks are still eager to win business from those who can meet stricter standards, with many of them cutting their variable rates for new customers.
ANZ has reduced its lowest variable rate to 2.29 percent, Westpac is giving its customers a two-year honeymoon rate of 2.09 percent and Commonwealth Bank is offering a variable initial rate of 2.14 percent.
“What these cuts at major banks show is that competition in the mortgage market is still very much alive, despite the RBA hikes,” said RateCity research director Sally Tindall. the Australian†
“While most variable customers will now face higher repayments, some banks eager to receive new customers are issuing waivers.”
It comes after all four big banks increased their floating interest rates for existing customers to match the Reserve Bank of Australia’s decision to raise the spot rate by 0.25 percentage point, from 0.1 percent to 0.35 percent.
Most analysts expect the RBA to continue to raise interest rates by as much as 2 percentage points over the next year.
While interest rate hikes are likely to drive home prices down, they also lower the amount of money people can borrow, and the gap between the two may not be as favorable to buyers as first hoped†
Putting the numbers together, Canstar found that for a couple with a combined income of $180,000, their borrowing capacity will fall by 2.6 percent thanks to the recent 0.25 percent hike — meaning they can borrow $34,000 less.
If interest rates rise by 2 percent, which many experts believe will happen next year, their borrowing capacity would be cut by $227,000 to just over $1 million.
In general, people could see their borrowing capacity drop by almost 18 percent if interest rates rose by 2 percent, meaning real estate prices would have to fall by more than this amount to be better off.
Experts predict sharp falls in house prices of anywhere between 5 percent and 15 percent, but these falls would not be enough to compensate for the reduced borrowing capacity.
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