A new crackdown on property lending has emerged in the wake of the Banking Royal Commission, with borrowers now being asked for deposits of up to 30 per cent and banks throwing greater scrutiny on location and living expenses when assessing loans.
- Data showing the riskiest suburbs in each city has been revealed
- Location is a factor banks are increasingly looking at when assessing home loans
- Finance experts say the current environment is particularly hard for borrowers
The pull back on new finance comes in the wake of a scathing assessment of the nation’s banks delivered by Commissioner Kenneth Hayne.
But the squeeze on credit has coincided with tumbling house prices on the east coast, creating what analysts have branded a “perfect storm” for borrowers trying to access finance.
While the biggest changes to lending standards happened between 2015 and 2017, banks have continued to bolster their assessment processes, now giving a specific focus to the living expenses of borrowers.
In addition, data obtained by the ABC shows the suburbs that lenders deem the most risky across Australia — a so-called “blacklist” of areas where location is deemed more of a liability to people seeking a loan.
In the new lending environment, one of the biggest shocks for borrowers is that the crackdown applies not just when accessing new credit, but also when refinancing existing loans.
This comes as some households are being hit by a surge in repayments as interest-only loans expire, triggering the need to begin paying down the principal amount borrowed that can add hundreds of dollars to monthly repayments.
“It’s probably been the most difficult time to acquire money in a long time, so a lot of people are probably being caught off guard,” Momentum Wealth team leader of finance Caylum Merrick said.
“It’s a bit of a perfect storm … with the Banking Royal Commission, that’s provided a whole other raft of challenges for borrowers regarding serviceability.”
An increasing number of people have begun approaching brokers like Mr Merrick, unable to service their loans or meet the new criteria demanded by the banks.
“The big thing is the way the banks are assessing loans at the moment is a lot different to what it was three to four years ago,” he said.
“And a lot of clients probably don’t understand that’s changed and are finding all of a sudden they can’t borrow as much as what they once [could].”
The nation’s riskiest suburbs
Banks are increasingly looking at location as one of the factors when approving new loans, marking down areas where there is a glut of housing supply, a downturn in the economy or the housing market has been particularly stagnant.
While it is difficult to source information on where the new standards are being applied, data company Digital Finance Analytics (DFA) has assessed which suburbs banks, including some of the majors, deemed as “higher risk”.
The data set — which the firm calls the “blacklist” — is based on criteria such as unsuccessful loan approvals or areas where finance has been harder to obtain.
In the higher-risk suburbs, banks have applied tighter lending criteria and required borrowers to find larger deposits to avoid paying costly mortgage insurance on top of their loans.
Perth is the capital city that tops the nation for the riskiest suburbs, and regional Western Australia is also home to the vast majority of blacklisted postcodes.
The three riskiest places in the country as assessed by DFA all fall within regional WA.
The towns of Newdegate, Bodallin and Pithara were each assigned the nation’s highest risk score of 46.1, compared with 27.9 for the suburb of Perth, 17.5 for Melbourne and 11.4 for Sydney.
Brisbane and Adelaide, which have both seen limited property growth in recent years, are close behind Perth in terms of risk to lenders.
While Melbourne and Sydney have led the nation in housing market growth in recent years, a downturn stretching for more than 18 months has resulted in the number of risky suburbs in both cities starting to increase.
Hobart has defied the national property downturn in recent years, but the latest figures from property monitoring firm CoreLogic and the Real Estate Institute of Tasmania show the city’s property boom is officially over.
In Canberra risk was relatively much lower across the board. The riskiest postcode — 2600, which includes the CBD — was seen as a safer bet than all but one suburb in WA, North Fremantle.
Lending crackdown adds thousands to loans
Location is not the only hurdle aspiring homeowners face when securing finance.
Some banks are now insisting borrowers find deposits of 30 per cent or more to avoid paying costly lenders mortgage insurance (LMI).
The more you borrow, the higher the risk to the bank, which is why lenders charge LMI to protect themselves against default.
The cost of this insurance is passed on to the borrower, adding thousands to the cost of a home loan.
The stock-standard trigger for the insurance to be applied was historically a loan greater than 80 per cent of the property’s value — known as an 80 per cent loan-to-value ratio (LVR).
“There are specific securities the banks will consider more high-risk, so they will apply different policies to those different securities,” Mr Merrick said.
“That might be apartments situated in a particular postcode where there’s a lot of supply and they’re looking at it from a risk mitigation point of view.
“So they might apply a maximum LVR of 70 per cent to that property — anything over that, you’re required to pay lenders mortgage insurance.”
Mr Merrick said the criteria hadn’t always been so strict, and borrowers needed to understand that being previously approved for a loan didn’t exempt them from the strict new criteria.
“So if you bought the property with a 20 per cent deposit, 80 per cent LVR, all of a sudden you go to refinance that and it’s all changed,” he said.
“You’re required to kick in more of your cash to just move from one bank to another.”
Banks have become ‘too difficult’
Amanda Bearcroft said she was trying to sell a property on the Hawksbury River, north-west of Sydney, but the couple keen to buy her house were told they had to find a 35 per cent deposit.
“At first they were told it would be 30 per cent, then the banks finally came back and said it was 35 per cent right at the very end,” Ms Bearcroft said.
“They also went through their statements for the past year I believe right down to the smallest expenses, including a $9.70 charge on the statement which turned out to be a coffee and banana bread,” she said.
Ms Bearcroft was concerned she now would not be able to sell the property.
“The banks have just got too difficult to borrow money off,” she said.
“We’re really going to need a cash buyer to come in and people don’t have that cash just lying there. It’s really difficult.
“Everybody that’s come through and have been interested have been told they are required to pay 30 per cent.”
Credit growth nosedives
In its latest Financial Stability Review released in April, the Reserve Bank of Australia (RBA) reported recent measures to reduce high-risk lending had curbed the maximum loan sizes available to most borrowers.
The RBA has labelled housing credit conditions as being “tighter than they have been for some time”, which has led to a nosedive in credit growth for both investor and owner-occupier loans.
Over the course of 2019 lenders would be able to access additional information on personal credit and mortgages of borrowers due to an expansion of credit reporting, which the RBA expected could lead to further tightening.
Fewer than 7 per cent of loans are now issued with a deposit of less than 10 per cent, while new interest-only lending has fallen to about 16 per cent of total loan approvals.
The number of loans with lending above 90 per cent has roughly halved over the past five years, while four out of five loans were now issued with a deposit of at least 20 per cent or more.
Goalposts shift for homeowners
Experts say the two main challenges of lending are a borrower’s equity position (the value of the property) and their availability to service the loan (how easily they can make repayments).
If the property market is going well, then borrowers only have one challenge — meeting the loan repayments. But the situation worsens in a falling market.
Perth homeowner Julia Ewert has been hit by the lending crackdown and said she felt the goalposts had suddenly moved.
“When I came to refinance … I was told in short there was nothing they could do anymore,” she said.
“My interest-only term had expired and they had to roll me over to principal and interest.
“I’ve always been able to roll over my interest-only term when that expires … and now they’ve said, ‘You can’t do that anymore’.”
Ms Ewert said she and her husband could not afford the $900 jump in monthly repayments required under the new lending standards and had been forced to sell their investment property in Perth’s south-east.
“We’ve got two young children, a two-year-old and a four-year-old, so the stability is everything to us, it determines every decision we make as a family,” Ms Ewert said.
“This is not something I want to sell, I’ve had this property for 10 years. I’m selling because I have to.”
Credit squeeze catching borrowers by surprise
Ms Ewert’s tale was becoming increasingly common across the country as homeowners struggled to pay their loans amid an environment of tumbling prices.
Sydney and Melbourne have suffered the greatest prices falls most recently, but the soft conditions on the east coast were dragging down growth in other markets around the country.
“Values are off 18 per cent in Sydney, which is an important number because that takes away 20 per cent growth on the way up in a market,” property analyst Gavin Hegney said.
“So for those buyers, they are now probably in negative equity situations and are probably feeling a little bit uncomfortable.
“Although banking has been tight before, it’s just been the drastic change — where it’s gone from quite liberal lending to quite tight lending over such a short period of time — that’s caught quite a few people unaware and affected the market quite significantly.”
Interest-only expiry the next big challenge
The situation is only expected to worsen, with the RBA estimating about $120 billion of interest-only loans were scheduled to convert to principal and interest repayments this year.
Most of these loans were written before 2015, when lending standards were weaker, and the RBA was concerned it could prove challenging for borrowers to meet the step-up in payments.
The Australian Prudential Regulation Authority attempted to cool the overheated property markets of Sydney and Melbourne in 2017 by curbing investor loans.
The measures — which led to a more than 90 per cent drop in the growth of investor loans — had since been lifted, but the effects of the policy were still being felt.
The ABC contacted the major banks for comment and all said they had responsible lending practices in place.
They said they took a range of factors into consideration when approving a loan, including the type and location of the property, and the borrower’s living expenses.
The Commonwealth Bank of Australia did not comment on whether it had changed its threshold for when LMI applied, but stated on its website that some borrowers might have to pay the insurance if they borrowed more than 70 per cent of the property value in certain postcodes.
Westpac said it had recently bolstered its processes for recording a borrower’s living expenses, including accounting for costs such as pet insurance, gym membership fees and media streaming services.
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