Is it difficult to obtain a mortgage in a context of rising interest rates?

Have banks implemented new lending parameters?

Banks are now making it harder for some people to get a loan because of changes they have made to what they consider acceptable debt ratios.

APRA said last week it would target banks that operate with higher DTI ratios, meaning riskier loans. As a result, National Australia Bank and ANZ Bank reduced their maximum ratios from nine times (meaning they would have given you a loan of up to nine times the amount of your income) to 7.5 times for ANZ and eight times for NAB. .

Commonwealth Bank and Westpac say most of their loans are closer to six times and seven times, but they will use different “spending floors” and add extra fat to your monthly outgoings to ensure you can repay your loan if your income pushes the ratio to nine times. So far, APRA has not asked them to curb these loans.

Another change is the way banks calculate your minimum monthly expenses. Banks use a benchmark model, assessing each quarter whether there have been changes in the macroeconomic environment. With inflation driving up household spending on things like gas, groceries, and utility bills, this growing benchmark is going to squeeze what you can borrow.

Banks also ask for more information when they see big one-time expenses, which means first-time homebuyers, in particular, should watch their expenses and be prepared to justify any large items.

Anecdotally, banks tracked everything from extra custody fees to extravagant bar tabs.

“If you have two working parents and children who are not of school age, they analyze childcare expenses much more closely,” says Richard Jefferies of Newbridge Home Loans.

How do banks adapt to different levels of risk?

One of the biggest hurdles for people trying to enter the real estate market is that banks charge you more for your loan if you have a lower deposit. The higher the loan-to-value ratio (or the lower your deposit/equity in your home), the higher your interest rate.

Westpac now offers rebates to retain new customers for two years, but at ANZ, for example, someone with an LVR of 70% pays 2.23% and the rate goes up to 3.23% if you’re at 90% LVR. .

APRA has made it clear that it regulates banks for the stability of the financial system and not to chill the real estate market.

But in December 2014, the authority introduced service measures to curb the runaway housing market and required banks to assess all borrowers against a 200 basis point hike, a floor of 7%. In 2019, he dropped the rule.

So far he has decided against imposing general ceilings on debt to equity, or other measures, but he said he was watching some banks more closely to ensure that loans “more risky” do not explode.

Debt-to-income ratios of six and above are considered “risky” by APRA, and the level of such loans has increased with rising house prices and low interest rates.

The latest quarterly report on the exposure to assets of authorized deposit-taking institutions. for the December 2021 quarter. shows that 24.4% of new mortgages had a DTI ratio of six times or more in dollar terms. This is up from 23.8% in the September quarter and just 17.3% a year ago.

Higher debt levels in a rising rate environment increase the risk that people will not be able to service their loans. This is especially the case as wages have not risen as rapidly as the Reserve Bank had indicated was necessary to justify the rate hikes.

Are banks worried about loan defaults?

In the context of rising rates, there is much talk about the number of owners who are ahead of their repayments – in the case of banks like National Australia Bank by more than four years on average. Indeed, borrowers who had long-term loans saw their interest rates drop for 11 years while the bank kept their repayments stable. This increased the amount of principal repaid on the loan each month.

With the rise in rates, these same customers will not see their repayments increase until the rate has reached that observed when taking out their loan. The spot rate has just risen to 0.85%. In October 2011, before rates started to fall, it was 4.75%, so there’s plenty of room before people who have been in the market for a while and haven’t refinanced take a shot in their pockets.

For the unlucky people who bought homes just before the cycle turned, and with the housing market at or near record highs, it’s a different story. Not only is their home value likely to drop, potentially putting those who had small deposits in a situation where their loan is worth more than their home, but they will also see repayments increase immediately.

Combined with the rising price of gas, groceries, utility bills and all the other factors causing inflation, new homeowners are going to feel the pinch and banks will be watching to close.

If the real estate market cools too quickly, it is these homeowners who will face potential difficulties as their assets could be worth less than their loans.

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