Big four banks tighten lending criteria as interest rates rise

Two of Australia’s biggest banks have tightened their home lending rules as recent data from Canstar suggests some Australian homebuyers could see a $227,000 drop in their borrowing capacity if interest rates continue to rise. ‘increase.

Two of Australia’s big four banks announced this week that they are tightening mortgage approval criteria and will no longer accept applications from borrowers whose debt-to-income ratio (DTI) is too high.

The move comes amid rising interest rates, with some analysts predicting further rises in the coming months, and concerns about what this could mean for Australians hoping to enter the housing market, as well as for those who are already repaying home loans.

ANZ Bank announced this week that from June 6, 2022, it will no longer accept applications from borrowers with a DTI of 7.5 or higher. This is down from the bank’s previous stance, when it was willing to consider applications from customers with a DTI of up to 9.

National Australia Bank (NAB) has also taken steps to limit lending to heavily indebted borrowers, announcing earlier this week that it would reduce its debt-to-income ratio limit from 9 to 8. However, the bank said that it would always consider lending above this level under certain circumstances, such as if an existing customer’s credit score is very high.

Commonwealth Bank and Westpac have yet to officially announce whether they will lower their leverage ratios for borrowers, although the current policy of both lenders is to apply stricter scrutiny to borrowers whose DTI exceeds a certain level.

Currently, CommBank has “stricter lending parameters” for borrowers with DTIs above 6, while Westpac also applies stricter screening to borrowers with DTIs above 7.

The debt-to-income ratio is a measure of a borrower’s debt to income, and banks and lenders use it as a key metric when evaluating home loan applications, as part of of their legal obligations to take into account an applicant’s ability to repay. the home loan they are applying for.

The higher the ratio, the more difficult it can be for a borrower to repay a loan, and therefore the higher the risk the borrower can pose to a lender. As mortgage interest rates begin to rise, major Australian banks are signaling that they are aware of concerns in this area.

When announcing the new, tougher DTI requirements, ANZ told brokers it was reviewing its lending policies amid rising interest rates. The bank noted that borrowers who take out loans at high multiples of their income are “more vulnerable to adverse changes in circumstances or loan terms”.

ANZ said its new limit is strict and there is “no appetite” to consider applications with a DTI of 7.5 or higher.

The tightening of lending criteria comes a month after the Reserve Bank of Australia (RBA) raised the official exchange rate for the first time since November 2020. The move saw most major banks and lenders hike interest rates. interest on home loans in response, and many analysts predicted a further rise in cash rates in June.

As interest rates rise, home loan repayments will become more expensive for Australians with variable rate mortgages, and there have already been concerns that further rises could see some borrowers find themselves in mortgage stress, potentially unable to meet their repayments.

Your home borrowing power is the amount of money you might be able to borrow from a bank or lender, depending on your financial situation and what you earn, as well as your expenses. , your debts and the amount of the mortgage deposit you have saved.

If interest rates rise, potential home buyers may find that their borrowing power is reduced. Recent research by Canstar found that the recent 0.25 percentage point increase in the official exchange rate had this effect, reducing the borrowing potential of a hypothetical two-middle-income Aussie couple by 2.6%. .

We considered scenarios where the cash rate could increase further, finding that in an extreme case, if the cash rate were to increase to 2.00% from its April 2022 level of 0.10%, then the borrowing power of an average Australian couple could be reduced. up to 17.6%. These percentages are similar for a single-earner household on the average Australian wage, with the caveat that these borrowers would often have lower borrowing power to begin with.

You can see the possible impact cash rate hikes could have on the borrowing power of single Australians below:

Source: www.canstar.com.au, 5 May 2022. Calculated using Canstar’s Home Loan Borrowing Capacity Calculator. Calculations assume a starting interest rate of 2.98% (the average homeowner’s P&I variable rate based on Canstar data) increasing with the cash rate. Other assumptions include a loan term of 30 years, annual gross income of $90,900 (November 2021; ABS average weekly wage, ordinary full-time), annual expenses of $16,500 for single, 80% income available for servicing a home loan, and a 3% interest rate cushion. All calculator input and output numbers are rounded to the nearest hundred dollars.

The table below shows the possible impact that further increases in cash rates could have on the borrowing power of couples:

Source: www.canstar.com.au, 5 May 2022. Calculated using Canstar’s Home Loan Borrowing Capacity Calculator. Calculations assume a starting interest rate of 2.98% (the average homeowner’s P&I variable rate based on Canstar data) increasing with the cash rate. Other assumptions include a loan term of 30 years, two gross annual incomes of $90,900 (November 2021; ABS average weekly earnings, ordinary full-time), annual expenses of $20,580 for a couple with no dependents. charge, 80% of disposable income to service a home loan and a 3% interest rate cushion. All calculator input and output numbers are rounded to the nearest hundred dollars.

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