21 March 2016 | Michael Janda |ABC News
Australia’s bank regulator APRA has found a significant tightening of home lending criteria since it began a crackdown in late 2014.
Tighter criteria mean that more marginal borrowers are increasingly likely to have their loan applications rejected, while those who do get finance will generally find they are offered a smaller maximum loan size.
A fresh survey into the treatment of four hypothetical borrowers shows that the average maximum amount that an owner-occupier could borrow fell by 6 per cent.
With APRA particularly concerned about the previously rapid growth in investor home loans, and introducing a speed limit on growth in that area, the maximum average loan to investors dropped 12 per cent.
“The hypothetical borrower exercise illustrated a material tightening of lending standards that we believe is appropriate and reflects more sensible risk assessment practices,” APRA’s general manager of industry analysis Heidi Richards told a conference on financial risk at Macquarie University on Friday.
APRA’s survey of 20 large banks, building societies and credit unions, conducted in September 2015, shows that just over half tightened their income testing for investor loans, with only one loosening its criteria.
The latest survey also shows that the majority of banks have raised their assumptions of how much households spend on living costs, thus reducing the amount of income left to service a loan.
However, half the institutions surveyed still set the level of expenses at those declared by the loan applicant, which Ms Richards said may not be conservative enough.
“Most people have a hard time actually estimating their own living expenses, so the customer-declared figure may not be particularly accurate,” she added.
Low deposit loans fall but interest only loans stay high
Another area where banks and other lenders have tightened-up is in applying interest rate floors and buffers to loan applications, meaning they test whether the borrower can withstand interest rate increases.
APRA’s 2014 hypothetical borrower exercise found such buffers wanting at many institutions, but last year’s survey showed all institutions at least complying with the minimum 7 per cent interest rate required by APRA.
Tighter lending criteria have seen total home loan growth slow from an annual rate of 7.5 per cent in November 2015 with an even sharper slowdown in investor lending growth from a peak of 11 per cent in May and June to 7.9 per cent in January.
However, the regulator is still keeping an eye on the historically high proportion of interest-only loans, and a recent rise in so-called non-conforming home loans.
“APRA data shows a recent uptick in loans approved outside serviceability; anecdotal evidence indicates much of this relates to loans in the pipeline that were pre-approved under older, looser criteria now being settled. So we expect to see this volume taper off,” Ms Richards noted.
No doubt APRA will continue watching this space closely, with home loans now making up two-thirds of bank loan portfolios, up from less than a quarter in the early 1990s.