Tighter credit lending – the new norm?
“APRA expects ADIs to commit to developing internal risk appetite limits on the proportion of new lending at very high debt to income levels (where debt is greater than 6 times a borrower’s income), and policy limits on maximum debt to income levels for individual borrowers”
These were the words that were contained in a letter recently penned by APRA to Australian authorised deposit-taking institutions (ADIs) stating that mortgage lenders would need to begin considering limiting lending to borrowers with very high debt to income levels.
Although there was no ‘hard’ limit imposed on loan to income (LTI) ratios greater than 6 times, we expected that this will seriously curtail the appetite of lenders to provide loans which are greater than 6 times of a borrower’s pre-tax income.
The aforementioned tighter lending practices by APRA, the Royal Commission’s increasing focus on responsible lending, and more onerous capital rules are resulting in tighter lending standards which are weighing on major banks’ mortgage growth: The major banks recorded just ~3.5% annualised mortgage growth over the past three months vs. ~4% a month earlier.
Let us take an example where a borrower is on a $120,000 salary (pre-tax and inclusive of superannuation) who owns a $700,000 owner-occupied with a mortgage of $350,000 owing.
The borrower wishes to borrow an additional $680,000 to buy a $850,000 investment property. The investment property is expected to generate $34,000 of rental income per year (being $650 per week).
How will tighter credit lending affect borrowing capacity?
Under the new rules, the starting point for a prospective borrower’s borrowing capacity would be $924,000, being $154,000 (the sum of $120,000 + $34,000) multiplied by 6. This would cap the additional borrowing at $574,000 only, after accounting for the $350,000 mortgage over the current owned occupier property and would not allow the prospective buyer sufficient financing to acquire the second investment property.
The new rules suggested by APRA removes living expenses (recently lambasted at the Royal Commission) from borrowing capacity calculations and provides a cap irrespective of how low interest rates will go. As seen above, we expect that this will be particularly restrictive for multiple property owners who have been parlaying their equity into more and more properties.
Combined with recent scrutiny of the retail banks from the recent Royal Commission as well as the recent softening of the Australian property market, it is expected that borrowers will find it much tougher going forward to borrow the amounts that they would require.
It is clear that the marginal buyer of today has less access to credit than they did 12 months or even 6 months ago. This has become evident in the official house prices which follow credit lending. It explains why Sydney is suffering more than anywhere else – 6 times of a borrower’s income will not buy you much in Sydney.
Everyone has a unique set of personal financial circumstances and priorities. With access to a wide variety of lenders, I am always happy to discuss which loan package is most suitable for you either in person, over the phone 02 8378 4293