Maximum loan sizes slashed: how banks are cracking down on borrowers

Date
    January 4, 2016
    Sydney Morning Herald

Major banks have lopped tens of thousands of dollars off how much they are prepared to lend home buyers reflecting tougher lending standards as property prices weaken.

A couple with combined income of $120,000 purchasing an investment property will have to make do with up to $80,000 less from a major bank than they would have had a year ago.

Tighter lending policies are also affecting owner-occupiers. The maximum loan size for the same hypothetical couple buying a home to live in has fallen by up to $65,000, according to calculations by mortgage broker Homeloanexperts.com.au.
The banks will be forced to slash their dividends if Australia slips into recession, UBS says.

The banks will be forced to slash their dividends if Australia slips into recession, UBS says. Photo: Jesse Marlow

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.

The latest data from Corelogic RP Data shows Sydney prices fell 1.2 per cent in December while national house prices were flat.


Banks have adopted more conservative assumptions about how much money customers will need to live on.

While national prices have not fallen since the boom started in 2012, the rate of growth has slowed to 7.8 per cent in the 2015 calender year compared to 8.5 per cent in 2014.

To measure the impact of tougher bank lending policies, Homeloanexperts 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.

Mortgage broker Christina Parnham 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," she 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.

    Thus begins the long slide of the real estate boom into the dustbin of history.

    Too late to get out now. And its all Turnbull's fault.

    This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank.   :(

Commenter
    AXIS
Date and time
    January 04, 2016, 2:45PM

wrote on Jan 4^th, 2016 at 7:52pm:

Thus begins the long slide of the real estate boom into the dustbin of history. Too late to get out now. And its all Turnbull's fault.     This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank.   :( Commenter     AXIS Date and time     January 04, 2016, 2:45PM

AXIS should stop loafing, get a job and pay some tax..... :D

Ah yes, personal attacks.

wrote on Jan 4^th, 2016 at 7:52pm:

Thus begins the long slide of the real estate boom into the dustbin of history.     Too late to get out now. And its all Turnbull's fault.     This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank. Commenter     AXIS Date and time     January 04, 2016, 2:45PM

Sounds like AXIS (now there's a rather sinister name if ever there was one) is lamenting the fact that property prices are not going to rise too much further out of the reach of lower income earners.  Perhaps AXIS has a multi-million dollar property portfolio and sees the value of it not delivering on the growth that it appeared to promise.

wrote on Jan 4^th, 2016 at 7:52pm:

Thus begins the long slide of the real estate boom into the dustbin of history.     Too late to get out now. And its all Turnbull's fault.     This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank.   :( Commenter     AXIS Date and time     January 04, 2016, 2:45PM

... and yet every quarter since the September 2013 election has shown growth, which by definition isn't a recession.

Armchair_Politician wrote on Jan 5^th, 2016 at 7:06am:

wrote on Jan 4th, 2016 at 7:52pm:     Thus begins the long slide of the real estate boom into the dustbin of history.     Too late to get out now. And its all Turnbull's fault.     This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank.   :( Commenter     AXIS Date and time     January 04, 2016, 2:45PM ... and yet every quarter since the September 2013 election has shown growth, which by definition isn't a recession.

While I don't agree with AXIS's views on what is to come, I don't think you can say yet that his statement is incorrect, as he did use the future tense.

Wolseley wrote on Jan 5^th, 2016 at 7:55am:

Armchair_Politician wrote on Jan 5th, 2016 at 7:06am: wrote on Jan 4th, 2016 at 7:52pm:     Thus begins the long slide of the real estate boom into the dustbin of history.     Too late to get out now. And its all Turnbull's fault.     This will be called "Turnbull's Recession" - he'll be smiling all the way to (his) bank.   :( Commenter     AXIS Date and time     January 04, 2016, 2:45PM ... and yet every quarter since the September 2013 election has shown growth, which by definition isn't a recession. While I don't agree with AXIS's views on what is to come, I don't think you can say yet that his statement is incorrect, as he did use the future tense.

I tend to agree, it is interesting though the fact that they are tightening up the loans although I think they have also been ordered to increase their holding reserves for emergencies (not sure about the correct term)

Quote:

Mortgage broker Christina Parnham 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," she says.

It's good to see the banks have had a reality check. Lending standards have been too lax for some time.

I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices.

Bam wrote on Jan 5^th, 2016 at 8:05am:

Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices.

Agree do you remember the interest rates of about 17% in the 70-80s?

Saul Goodman wrote on Jan 5^th, 2016 at 8:08am:

Bam wrote on Jan 5th, 2016 at 8:05am: Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices. Agree do you remember the interest rates of about 17% in the 70-80s?

Yes, I had term deposits.

The upside, which I put first, is probably many people will be saved from over-committing themselves.
The downside unfortunately is that it is a definite negative for economic activity.

another claim of upcoming recession. the 563rd we've had in the past 5 years.

bogarde73 wrote on Jan 5^th, 2016 at 3:25pm:

The upside, which I put first, is probably many people will be saved from over-committing themselves. The downside unfortunately is that it is a definite negative for economic activity.

Agree on the first, disagree on the second.

Before the banks tightened their lending criteria, the housing market resembled a Ponzi scheme. The housing market was overheated compared to the rest of the economy. If the housing market ended up collapsing - an unlikely but non-negligible economic risk - that would have been a huge blow to the economy.

With lending criteria for housing being tighter, the result would be a more balanced investment environment. Businesses in particular would benefit from more investment. So rather than being a negative for the economy, it could end up being a positive. We are trading a risk of collapsing housing prices with a more predictable economy. Even if the tighter lending criteria was a negative, it's not a huge one. I would rather have a balanced economy than one based primarily on people selling overpriced real estate to each other.

Bam wrote on Jan 5^th, 2016 at 4:34pm:

bogarde73 wrote on Jan 5th, 2016 at 3:25pm: The upside, which I put first, is probably many people will be saved from over-committing themselves. The downside unfortunately is that it is a definite negative for economic activity. Agree on the first, disagree on the second. Before the banks tightened their lending criteria, the housing market resembled a Ponzi scheme. The housing market was overheated compared to the rest of the economy. If the housing market ended up collapsing - an unlikely but non-negligible economic risk - that would have been a huge blow to the economy. With lending criteria for housing being tighter, the result would be a more balanced investment environment. Businesses in particular would benefit from more investment. So rather than being a negative for the economy, it could end up being a positive. We are trading a risk of collapsing housing prices with a more predictable economy. Even if the tighter lending criteria was a negative, it's not a huge one. I would rather have a balanced economy than one based primarily on people selling overpriced real estate to each other.

the tighter lending criteria is no more complex that banks responding to perceived increased risk and attempting to reduce it by lowering the amount they lend. it happens from time to time and if 2016 sees the economy continue to grow and unemployment continue to fall, the criteria will relax again.  It is wholly unrelated to housing price policy.

longweekend58 wrote on Jan 5^th, 2016 at 5:04pm:

Bam wrote on Jan 5th, 2016 at 4:34pm: bogarde73 wrote on Jan 5th, 2016 at 3:25pm: The upside, which I put first, is probably many people will be saved from over-committing themselves. The downside unfortunately is that it is a definite negative for economic activity. Agree on the first, disagree on the second. Before the banks tightened their lending criteria, the housing market resembled a Ponzi scheme. The housing market was overheated compared to the rest of the economy. If the housing market ended up collapsing - an unlikely but non-negligible economic risk - that would have been a huge blow to the economy. With lending criteria for housing being tighter, the result would be a more balanced investment environment. Businesses in particular would benefit from more investment. So rather than being a negative for the economy, it could end up being a positive. We are trading a risk of collapsing housing prices with a more predictable economy. Even if the tighter lending criteria was a negative, it's not a huge one. I would rather have a balanced economy than one based primarily on people selling overpriced real estate to each other. the tighter lending criteria is no more complex that banks responding to perceived increased risk and attempting to reduce it by lowering the amount they lend. it happens from time to time and if 2016 sees the economy continue to grow and unemployment continue to fall, the criteria will relax again.  It is wholly unrelated to housing price policy.

Gee wizz Longy,

you're old fibro dump in Adelaide will be worth a lot less now.

Saul Goodman wrote on Jan 5^th, 2016 at 8:08am:

Bam wrote on Jan 5th, 2016 at 8:05am: Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices. Agree do you remember the interest rates of about 17% in the 70-80s?

Ah yes, Paul Keating's legacy......

Bam wrote on Jan 5^th, 2016 at 9:09am:

Saul Goodman wrote on Jan 5th, 2016 at 8:08am: Bam wrote on Jan 5th, 2016 at 8:05am: Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices. Agree do you remember the interest rates of about 17% in the 70-80s? Yes, I had term deposits.

Lucky You

Most of us had home loans!

But thems were the times! ::) ::) ::)

Swagman wrote on Jan 5^th, 2016 at 6:18pm:

Saul Goodman wrote on Jan 5th, 2016 at 8:08am: Bam wrote on Jan 5th, 2016 at 8:05am: Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices. Agree do you remember the interest rates of about 17% in the 70-80s? Ah yes, Paul Keating's legacy......

Yes but we could afford to pay our 17%.

The poor kids of today would be stuffed at 12%

Hope your kids are loaded Swagman you being a credit manager!

Perhaps you should become loans manager! 

Mmm no that needs brains, better consult aquascoot he has all the answers

 ;D ;D ;D ;D ;D ;D

Bobby. wrote on Jan 5^th, 2016 at 6:14pm:

longweekend58 wrote on Jan 5th, 2016 at 5:04pm: Bam wrote on Jan 5th, 2016 at 4:34pm: bogarde73 wrote on Jan 5th, 2016 at 3:25pm: The upside, which I put first, is probably many people will be saved from over-committing themselves. The downside unfortunately is that it is a definite negative for economic activity. Agree on the first, disagree on the second. Before the banks tightened their lending criteria, the housing market resembled a Ponzi scheme. The housing market was overheated compared to the rest of the economy. If the housing market ended up collapsing - an unlikely but non-negligible economic risk - that would have been a huge blow to the economy. With lending criteria for housing being tighter, the result would be a more balanced investment environment. Businesses in particular would benefit from more investment. So rather than being a negative for the economy, it could end up being a positive. We are trading a risk of collapsing housing prices with a more predictable economy. Even if the tighter lending criteria was a negative, it's not a huge one. I would rather have a balanced economy than one based primarily on people selling overpriced real estate to each other. the tighter lending criteria is no more complex that banks responding to perceived increased risk and attempting to reduce it by lowering the amount they lend. it happens from time to time and if 2016 sees the economy continue to grow and unemployment continue to fall, the criteria will relax again.  It is wholly unrelated to housing price policy. Gee wizz Longy, you're old fibro dump in Adelaide will be worth a lot less now.

went up $50K last year.  imagine how sad that makes me feel:)  and i paid $37K for it!!!

longweekend58 wrote on Jan 5^th, 2016 at 7:36pm:

went up $50K last year.  imagine how sad that makes me feel:)  and i paid $37K for it!!!

Sell it now while you can still get a few pennies for it.

Bobby. wrote on Jan 5^th, 2016 at 8:39pm:

longweekend58 wrote on Jan 5th, 2016 at 7:36pm: went up $50K last year.  imagine how sad that makes me feel:)  and i paid $37K for it!!! Sell it now while you can still get a few pennies for it.

because there is a housing crash in progress?  same old booby, same old crap

Saul Goodman wrote on Jan 5^th, 2016 at 6:36pm:

Bam wrote on Jan 5th, 2016 at 9:09am: Saul Goodman wrote on Jan 5th, 2016 at 8:08am: Bam wrote on Jan 5th, 2016 at 8:05am: Quote: Mortgage broker Christina Parnham 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," she says. It's good to see the banks have had a reality check. Lending standards have been too lax for some time. I have suggested that prospective borrowers calculate the maximum size of their loan as if interest rates are 10%. If a borrower cannot afford the loan with 10% interest rates, they can't afford the loan if they end up with less income. The borrower may not get as nice a house, but they would end up with a house that they are less likely to have to sell at fire-sale prices. Agree do you remember the interest rates of about 17% in the 70-80s? Yes, I had term deposits. Lucky You Most of us had home loans! But thems were the times! ::) ::) ::)

I do have sympathy for those with home loans who had to pay those interest rates. But it does help to keep things into perspective. Interest rates were not the whole story.

Inflation had yet to be brought under control and was 10% or more for some of that time. Interest rates need to be greater than the inflation rate lest money lose purchasing value.

The average home loan was a lot smaller then in relation to household income. It was still possible to service a home loan with a single income.

Taking these into account, it's clear that interest rates needed to be a lot higher to have the same restraining effect on spending as a modest rise in interest rates has today.