This is big, via the AFR:
Home loan applicants at Westpac will have to reveal spending on everything from pet care to tax and toiletries, under a tough new “responsible lending” regime being introduced from next Tuesday.
…”We are making changes to understand the granularity of our customers’ expenses and liabilities,” the bank is telling staff and mortgage brokers, who provide about 46 per cent of mortgage flows.
It is also to stop “liar loans” issued on exaggerated income and understated expenses that have the potential of undermining underwriting standards and increasing vulnerability to sharp economic corrections.
This may well herald the death of HEM, previously from UBS:
Base case: Pre-underwriting tightening scenario
Prior to late 2017 between 70-80% of all home loans in Australia were underwritten using the HEM benchmark to estimate living expenses (consistent with ANZ’s statement to the Royal Commission).
The HEM benchmark is estimated based on the State in which the borrower lives, the number of dependent children and your lifestyle across ‘student’, ‘basic’, ‘moderate’ or ‘lavish’. However, in the vast majority of cases the ‘basic’ lifestyle assumption is used. The HEM benchmark of living expenses is now also increased with household income, but we believe this is only a recent adjustment and we have not taken this into account in this scenario.
Based on the average of the four Major bank’s mortgage calculators the estimated borrowing capacity of a mortgagor based on Gross Household Income can be seen in Figure 3.
This suggests that potential mortgagors will be able to borrow >5x and in some cases >6x their income. This is also consistent with NAB’s recent announcement that it is reducing the hard cap on mortgagor’s Loan-to-Income ratio to 7x (from 8x).
…When we re-ran the Major banks’ home loan calculators using the higher living expenses (refer Figure 4) we found the borrowing limit fell sharply, by 30-40% in many cases.
WBC is only getting ahead of the curve here. This is pure Royal Commission fallout. The others will have to do it too.
Sell property.
