Home loan check: Are tighter lending conditions on the way?

Borrowers may soon face higher hurdles when applying for a home loan, as regulators explore potential policy options aimed at cooling down Australia’s white hot property market.

Macroprudential controls currently being considered by APRA include tighter debt-to-income and loan-to-value ratios, as well as tougher rules around interest-only and investor lending.

The Commonwealth Bank has already revised its assessment rate ahead of any prompting from regulators, bumping it up from 5.1% to 5.25%. More lenders are expected to follow suit.

The assessment rate is a serviceability buffer banks use to gauge borrowers’ capacity to repay their loan in the event of a rate hike.

Not too long ago, lenders were required to use an assessment rate of at least 7%. But this was amended in July 2019 to better reflect the current interest rate environment. 

Nowadays, it’s recommended that banks add a margin of at least 2.5% to their home loan rates when assessing applicants, or use an assessment rate of their own — whichever is higher.

CommBank now has the highest minimum floor rate of the big four banks. ANZ has the second highest at 5.10%, followed by Westpac at 5.05% and NAB at 4.95%.

The decision to tighten standards means some borrowers will have to lower their expectations when applying for a loan, but CommBank says the vast majority of customers will be unaffected.

Regulators monitor rising household debt

Record low interest rates have fueled a sprint to the property market, with home prices shooting up 10.6% in 2021 according to property research firm CoreLogic. 

This is welcome news for the Reserve Bank of Australia, which sees rising home prices as key to unlocking consumer confidence and getting the economy firing on all cylinders.

For this reason, it’s unlikely to factor house price sustainability into its monetary policy decisions, as the Reserve Bank of New Zealand has recently been directed to do.

This was confirmed by RBA governor Philip Lowe in a conference last Thursday when he said the RBA “does not, and should not, target housing prices.”

But the RBA boss said the Bank will be keeping a close eye on borrowing trends, especially in light of the meteoric growth in household debt in Australia.

A recent OECD report revealed that Australia has the second-highest level of mortgage debt among advanced economies at 90% of GDP. 

While regulators maintain that overall conditions are sound, they have expressed concern about signs of increased risk-taking among lenders.

APRA deputy chairman John Lonsdale said the regulator had recently reached out to the country’s largest deposit-taking institutions for assurance that lending standards have not deteriorated.

“All boards should be closely monitoring their lending standards, comfortable with their risk appetite and testing whether serviceability policies used to assess borrowers remain prudent in an environment of extremely low interest rates,” he said.

For more information on property and lending trends, visit our home loan statistics page.