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 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.
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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