Have banks introduced new credit parameters?
The banks are now making it harder for some people to get a loan because of their changes in what they consider to be acceptable debt-to-income ratios.
APRA said last week it would target banks that operate with higher DTI ratios, meaning more risky lending. As a result, National Australia Bank and ANZ Bank lowered their maximum ratios from nine times (meaning they would have given you a loan up to nine times your income) to 7.5 times for ANZ and eight times for NAB .
Commonwealth Bank and Westpac say most of their loans are closer to six and seven times, but they will use different “cost caps” and add extra fat to your monthly expenses to ensure you can pay off your loan if your income exceeds the ratio. up to nine times. So far, APRA has not asked them to rein in this lending.
Another change is the way the banks calculate your minimum monthly payments. The banks use a benchmark model, which assesses every quarter whether there have been changes in the macroeconomic environment. With inflation pushing up household spending on things like gasoline, groceries and utility bills, this rising benchmark will shrink the money you can borrow.
The banks are now also asking for more information when they see large one-time expenses, meaning first-time homebuyers in particular should pay attention to their spending and be prepared to justify large items.
Anecdotally, the banks have been tracking everything from extra childcare fees to extravagant bar tabs.
“If you have two parents who are working and children who are not yet of school age, they take a much closer look at childcare spending,” says Richard Jefferies of Newbridge Home Loans.
How do the banks adapt to different risk levels?
One of the biggest hurdles for people trying to get into the real estate market is banks making you pay more for your loan if you have a lower down payment. The higher the loan-to-value ratio (or the lower your investment/equity in your home), the higher your interest rate.
Westpac now offers discounts to retain new customers for two years, but at ANZ, for example, someone with a 70 percent LVR pays 2.23 percent and the rate goes up to 3.23 percent if you have a 90 percent LVR.
APRA has made it clear that it regulates banks for the stability of the financial system – not to cool the real estate market.
But in December 2014 government has put in place usability measures to slow down a runaway housing market and requires banks to rate all borrowers against an increase of 200 basis points, or a floor of 7 percent. In 2019, it removed the rule.
So far, it has decided not to impose general limits on debt or other measures, but has said it is keeping a closer eye on certain banks to ensure ‘riskier’ lending doesn’t spiral out of control.
Debt-to-income ratios of six and above are considered “risky” by APRA, and the level of these loans has risen with rising property prices and low interest rates.
The most recent quarterly report on the real estate exposure of a deposit-taking institution. for the December 2021 quarter. shows that 24.4 percent of new mortgages had a dollar-denominated DTI ratio of six times or more. This is up 23.8 percent in the September quarter, from just 17.3 percent a year ago.
Higher debt in an environment of rising interest rates increases the likelihood that people will not be able to pay off their loans. This is especially true because wages have not risen as quickly as the Reserve Bank had indicated it needed to justify rate hikes.
Are banks concerned about payment arrears?
Against the backdrop of rising interest rates, there is a lot of talk about how many homeowners are ahead in their repayments – in the case of banks like the National Australia Bank by more than four years on average. This is because long-term borrowers have seen their interest rates fall for 11 years while the bank kept their repayments stable. This increased the amount of principal paid off each month on the loan.
As rates increase, those same customers will not see their repayments increase until the rate reaches the rate that was seen when they took out their loan. The cash rate just increased to 0.85 percent. In October 2011, before the interest rate started to fall, it was 4.75 percent, so there’s still a lot of wiggle room before the folks who’ve been in the market for a while and haven’t refinanced take a hit in the wallet.
For the unlucky folks who bought homes just before the cycle ended, and with the real estate market at or near record highs, it’s a different story. Not only will the value of their home likely fall, potentially putting those with smaller deposits in a situation where their loan is worth more than their home, they will also see repayments go up right away.
Combined with the rising price of gasoline, groceries, utility bills and all the other factors that are driving inflation, newer homeowners will feel the pain and will be watching banks closely.
If the real estate market cools too quickly, these homeowners will face potential problems as their assets may be worth less than their loans.
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