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.

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

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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.

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


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.

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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.

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

Yes, I had term deposits.

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

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


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.