A new report from Merrill Lynch argues that recent spikes in the cost of key consumer items — including petrol, food and electricity — means the big four banks will have little choice but to reverse their current stance of relaxing lending standards to attract home loan customers.
After tightening lending criteria at the start of the global financial crisis, banks have been progressively lowering the bar as they fight for mortgage customers. Most of them have done this by increasing the maximum amount they are prepared to lend against the value of a house, or the loan-to-valuation ratio (LVR).
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Merrill Lynch rates the ANZ as having the most conservative LVR policy. It will lend 92 per cent of the price of a house to new borrowers, compared with 95 per cent for the National Australia Bank and 97 per cent for Westpac Banking Corporation and the Commonwealth Bank.At the height of the financial crisis in 2008, all the major banks cut their maximum loan ratios to about 90 per cent.
If the banks do a U-turn and return to the practice of requiring an LVR of 90 per cent, it will spell trouble for two major groups of buyers: investors who are looking to buy properties while house price growth is sluggish and home owners keen to upgrade their living space.
First home buyers already face tremendous difficulties in saving for a home deposit. They will receive a second financial body blow if a more cautious loan assessment regime takes hold.
When you apply for a loan, banks apply an interest rate buffer to your income to ensure you have enough capacity to repay the loan if further interest rate rises occur.
They also calculate a borrower’s average living costs to determine what they can safely lend. But Merrill Lynch research analyst Matthew Davison says household budgets are increasingly coming under pressure because of sharp rises in living costs.
Banks already put a big discount on living costs when assessing disposable income for borrowers. But this assessment process is likely to change as internal bank borrower models are upgraded and new responsible lending laws begin to have an impact on housing lending.
‘‘We believe the strain on the household budget is too big to ignore and banks don’t accurately measure household costs,’’Mr Davison says.
He says these pressures could prompt the banks to update household budget models, thereby tightening mortgage lending standards. Any change to lending models is likely to result in a smaller average mortgage and to slow the pace of lending.
Kristy Sheppard, a spokeswoman for the national mortgage broking group Mortgage Choice, notes that lenders are applying ‘‘more scrutiny over each loan application’’ than previously, partly as a result of the new National Consumer Credit Protection Act.
‘‘In terms of lending criteria, we haven’t seen any tightening up,’’ she says. ‘‘We have seen an LVR of 95 per cent become standard and a number of special offers have been released into the market because lenders are trying to boost their home loan volumes.’’
But Mr Davison says loose lending standards are unsustainable, particularly in light of the credit protection laws that put the onus on lenders to assess whether borrowers have the capacity to make repayments.
He expects borrowing criteria to soon be tightened, with major consequences for the housing market.
‘‘We believe the end result will contribute to a correction in house prices,’’ he says.
