Interest rates

Australian banks tighten lending standards as interest rates rise

Australian banks are making changes that could make it even harder for homebuyers who are struggling to enter the market.

Homebuyers could find it even harder to get a loan as rising interest rates prompt Australia’s big banks to tighten their lending standards.

ANZ has confirmed that it will only accept home loan applications with a debt-to-income ratio below 7.5, meaning customers will not be able to borrow that much. He said he made the decision, which will take effect from June 6, “in view of the evolution of interest rates“.

“ANZ regularly reviews lending appetite and policies as the economic environment changes to ensure we continue to lend prudently to our customers,” an ANZ spokesperson said.

The debt-to-income ratio calculates a person’s total monthly debt and divides it by their monthly income.

ANZ’s move follows National Australia Bank’s decision to cut its debt-to-income ratio limit from nine to eight times, although NAB is still considering lending at higher levels if individual customer credit checks are positive.

“NAB will continue to prioritize responsible lending in its approach to lending and we welcome continued consultation with regulators,” said NAB executive Kirsten Piper.

Other banks say they will also apply greater scrutiny to loans with a higher debt-to-income ratio (DTI).

A Commonwealth Bank spokesperson said it applied stricter lending parameters for loans with a debt-to-income ratio greater than six times and where the customer had a small deposit.

Westpac said loans with a DTI of seven times or more are automatically sent to the credit team for manual review.

“The DTI ratio is one of many considerations when we review home loan applications,” a spokeswoman said. “We also rate borrowers at a higher interest rate than their original rate to ensure they can handle future interest rate changes.”

The Australian Prudential Regulation Authority (APRA) considers a DTI more than six times as potentially higher risk, as well as interest-only loans and loans approved with less than 10% deposit.

Last October, APRA noted that levels of household debt relative to income were very high – both historically and internationally – in part due to very low interest rates and rapidly rising prices. real estate.

He said the rate of household credit growth would likely outpace income growth for the foreseeable future, further adding to debt levels.

APRA said all financial institutions should operate with a buffer of at least 3.0 percentage points on the loan interest rate.

It will also consider the need for “additional macroprudential measures” if lending at high debt-to-income ratios continues to rise.

However, banks still seem keen to win business from those who can meet higher standards, with many lowering their variable rates for new customers.

ANZ cut its lowest floating rate to 2.29%, Westpac is offering customers a two-year honeymoon rate of 2.09% and Commonwealth Bank is offering a starting floating rate of 2.14%.

“What these cuts at big banks show is that competition in the mortgage market is still alive, despite the RBA hikes,” said RateCity research director Sally Tindall. The Australian.

“While most variable customers will now face higher refunds, some banks eager for new business are granting exemptions.”

It comes after the big four banks raised their variable interest rates for existing customers to match the Reserve Bank of Australia’s decision to raise the cash rate by 0.25 percentage points, from 0.1 % to 0.35%.

Most analysts expect the RBA to continue raising rates, up to 2 percentage points over the next year.

While interest rate hikes likely help lower house prices, they also reduce the amount of money people can borrow, and the gap between the two may not be as beneficial to buyers as it is. they initially hoped.

Canstar crunched the numbers and found that for a couple with a combined income of $180,000, their ability to borrow will decline by 2.6% thanks to the recent 0.25% rate hike, meaning that he will be able to borrow $34,000 less.

If interest rates rise by 2%, which many experts predict by next year, their borrowing power would be reduced by $227,000, to just over $1 million.

Overall, people could see their borrowing capacity reduced by almost 18% if interest rates rose by 2%, meaning house prices would have to fall by more than that amount for they do better.

Experts predict substantial declines in property prices, in the order of 5 to 15%, but these declines would not be enough to compensate for the reduction in borrowing capacity.