Fear time: ABC reveals bank’s mortgage “blacklist”

Via the ABC comes fear and lot’s of it:

A new crackdown on property lending has emerged in the wake of the Banking Royal Commission, with borrowers now being asked for deposits of up to 30 per cent and banks throwing greater scrutiny on location and living expenses when assessing loans.

The pull back on new finance comes in the wake of a scathing assessment of the nation’s banks delivered by Commissioner Kenneth Hayne.

But the squeeze on credit has coincided with tumbling house prices on the east coast, creating what analysts have branded a “perfect storm” for borrowers trying to access finance.

While the biggest changes to lending standards happened between 2015 and 2017, banks have continued to bolster their assessment processes, now giving a specific focus to the living expenses of borrowers.

In addition, data obtained by the ABC shows the suburbs that lenders deem the most risky across Australia — a so-called “blacklist” of areas where location is deemed more of a liability to people seeking a loan.

In the new lending environment, one of the biggest shocks for borrowers is that the crackdown applies not just when accessing new credit, but also when refinancing existing loans.

This comes as some households are being hit by a surge in repayments as interest-only loans expire, triggering the need to begin paying down the principal amount borrowed that can add hundreds of dollars to monthly repayments.

“It’s a bit of a perfect storm … with the Banking Royal Commission, that’s provided a whole other raft of challenges for borrowers regarding serviceability.”

An increasing number of people have begun approaching brokers like Mr Merrick, unable to service their loans or meet the new criteria demanded by the banks.

“The big thing is the way the banks are assessing loans at the moment is a lot different to what it was three to four years ago,” he said.

“And a lot of clients probably don’t understand that’s changed and are finding all of a sudden they can’t borrow as much as what they once [could].”

The nation’s riskiest suburbs

Banks are increasingly looking at location as one of the factors when approving new loans, marking down areas where there is a glut of housing supply, a downturn in the economy or the housing market has been particularly stagnant.

While it is difficult to source information on where the new standards are being applied, data company Digital Finance Analytics (DFA) has assessed which suburbs banks, including some of the majors, deemed as “higher risk”.

The data set — which the firm calls the “blacklist” — is based on criteria such as unsuccessful loan approvals or areas where finance has been harder to obtain.

In the higher-risk suburbs, banks have applied tighter lending criteria and required borrowers to find larger deposits to avoid paying costly mortgage insurance on top of their loans.

Location is not the only hurdle aspiring homeowners face when securing finance.

Some banks are now insisting borrowers find deposits of 30 per cent or more to avoid paying costly lenders mortgage insurance (LMI).

The more you borrow, the higher the risk to the bank, which is why lenders charge LMI to protect themselves against default.

The cost of this insurance is passed on to the borrower, adding thousands to the cost of a home loan.

The stock-standard trigger for the insurance to be applied was historically a loan greater than 80 per cent of the property’s value — known as an 80 per cent loan-to-value ratio (LVR).

But since the crackdown on credit, banks have begun lowering this threshold.

“There are specific securities the banks will consider more high-risk, so they will apply different policies to those different securities,” Mr Merrick said.

“That might be apartments situated in a particular postcode where there’s a lot of supply and they’re looking at it from a risk mitigation point of view.

“So they might apply a maximum LVR of 70 per cent to that property — anything over that, you’re required to pay lenders mortgage insurance.”

Mr Merrick said the criteria hadn’t always been so strict, and borrowers needed to understand that being previously approved for a loan didn’t exempt them from the strict new criteria.

“So if you bought the property with a 20 per cent deposit, 80 per cent LVR, all of a sudden you go to refinance that and it’s all changed,” he said.

Banks have become ‘too difficult’

Amanda Bearcroft said she was trying to sell a property on the Hawksbury River, north-west of Sydney, but the couple keen to buy her house were told they had to find a 35 per cent deposit.

“At first they were told it would be 30 per cent, then the banks finally came back and said it was 35 per cent right at the very end,” Ms Bearcroft said.

“They also went through their statements for the past year I believe right down to the smallest expenses, including a $9.70 charge on the statement which turned out to be a coffee and banana bread,” she said.

Ms Bearcroft was concerned she now would not be able to sell the property.

“We’re really going to need a cash buyer to come in and people don’t have that cash just lying there. It’s really difficult.

“Everybody that’s come through and have been interested have been told they are required to pay 30 per cent.”

Credit growth nosedives

In its latest Financial Stability Review released in April, the Reserve Bank of Australia (RBA) reported recent measures to reduce high-risk lending had curbed the maximum loan sizes available to most borrowers.

The RBA has labelled housing credit conditions as being “tighter than they have been for some time”, which has led to a nosedive in credit growth for both investor and owner-occupier loans.

Over the course of 2019 lenders would be able to access additional information on personal credit and mortgages of borrowers due to an expansion of credit reporting, which the RBA expected could lead to further tightening.

Fewer than 7 per cent of loans are now issued with a deposit of less than 10 per cent, while new interest-only lending has fallen to about 16 per cent of total loan approvals.

The number of loans with lending above 90 per cent has roughly halved over the past five years, while four out of five loans were now issued with a deposit of at least 20 per cent or more.

Goalposts shift for homeowners

Experts say the two main challenges of lending are a borrower’s equity position (the value of the property) and their availability to service the loan (how easily they can make repayments).

If the property market is going well, then borrowers only have one challenge — meeting the loan repayments. But the situation worsens in a falling market.

Perth homeowner Julia Ewert has been hit by the lending crackdown and said she felt the goalposts had suddenly moved.

“When I came to refinance … I was told in short there was nothing they could do anymore,” she said.

“My interest-only term had expired and they had to roll me over to principal and interest.

“I’ve always been able to roll over my interest-only term when that expires … and now they’ve said, ‘You can’t do that anymore’.”

Ms Ewert said she and her husband could not afford the $900 jump in monthly repayments required under the new lending standards and had been forced to sell their investment property in Perth’s south-east.

“We’ve got two young children, a two-year-old and a four-year-old, so the stability is everything to us, it determines every decision we make as a family,” Ms Ewert said.

Credit squeeze catching borrowers by surprise

Ms Ewert’s tale was becoming increasingly common across the country as homeowners struggled to pay their loans amid an environment of tumbling prices.

Sydney and Melbourne have suffered the greatest prices falls most recently, but the soft conditions on the east coast were dragging down growth in other markets around the country.

“Values are off 18 per cent in Sydney, which is an important number because that takes away 20 per cent growth on the way up in a market,” property analyst Gavin Hegney said.

“So for those buyers, they are now probably in negative equity situations and are probably feeling a little bit uncomfortable.

“We’d have to go back to the mid-1970s before we had the last credit squeeze in Australia.

“Although banking has been tight before, it’s just been the drastic change — where it’s gone from quite liberal lending to quite tight lending over such a short period of time — that’s caught quite a few people unaware and affected the market quite significantly.”

Interest-only expiry the next big challenge

The situation is only expected to worsen, with the RBA estimating about $120 billion of interest-only loans were scheduled to convert to principal and interest repayments this year.

Most of these loans were written before 2015, when lending standards were weaker, and the RBA was concerned it could prove challenging for borrowers to meet the step-up in payments.

The Australian Prudential Regulation Authority attempted to cool the overheated property markets of Sydney and Melbourne in 2017 by curbing investor loans.

The measures — which led to a more than 90 per cent drop in the growth of investor loans — had since been lifted, but the effects of the policy were still being felt.

The ABC contacted the major banks for comment and all said they had responsible lending practices in place.

They said they took a range of factors into consideration when approving a loan, including the type and location of the property, and the borrower’s living expenses.

The Commonwealth Bank of Australia did not comment on whether it had changed its threshold for when LMI applied, but stated on its website that some borrowers might have to pay the insurance if they borrowed more than 70 per cent of the property value in certain postcodes.

Westpac said it had recently bolstered its processes for recording a borrower’s living expenses, including accounting for costs such as pet insurance, gym membership fees and media streaming services.

Comments

  1. “Ms Bearcroft was concerned she now would not be able to sell the property.”

    She doesn’t want to give it away! Perhaps she needs to lower the price, a lot.

    • kannigetMEMBER

      The problem for Ms Bearcroft is that if the only people interested in buying her property only have a 10% deposit saved She will need to drop her price by 66% so they can afford to buy…..

      I dont think people realise how effective these deposit requirements are on reducing loan affordability, far more effective than a 0.25 % change in interest rate.

      • kannigetMEMBER

        I agree its should be banned but this scenario is not due interest only, if there is a 30% deposit requirement it is likely to be small rural or hobby farm and based on the location I would say that is probably it. The point I was making applies across all lending types.

        If you move the minimum deposit from 10% to 20% you prevent the majority of potential buyers to pull out. If you wish to sell and there is now a 20% requirement to find that big pool of potential buyer you have to drop your asking price by 50% to even meet them and then you still know they cant go above it.

        Even if the distribution of the size of deposits held by potential buyers follows a Bell curve distribution you probably need to reduce your prices by a 1/3 to find enough buyers willing to buy you property….

        Banks seem to be somewhat worried about the equity position of most of the loans they have provided. By insisting on higher deposits they possibly think that they will replace bad equity positions with good ones and help sure up the equity position against the potential drops. I think that if this is the case they are risking causing a much larger crash as they chase buyers to the bottom of prices.

        Personally if it is only property that is effected then I am happy because my kids have a chance of buying a home but I know that if this comes crashing down too quick we will all be in a precarious position.

      • BubbleyMEMBER

        I agree Aaron.
        If a person can’t afford to pay the principal and interest, they can’t afford the loan.

    • TighterandTighter

      I wonder if this was the property on Escape from the City where a couple picked a place on the Hawkesbury made offer, accepted and then finance fell through

    • Poor property owner wants to have her banana bread, coffee and eat it too. Should have gone the smashed avocados.

  2. Interesting that the high risk suburbs of Sydney is the wealthy leafy and beachy north – rather than the mortgage stressed out south west.

    • These are the suburbs where people take out big mortgages (especially the mortgage “hills”) and where competition for houses was more intensive. Now that the maximum capacity has significantly lowered particularly for the middle class these will be harder hit as a result. The bigger the boom and the more greed and FOMO the bigger the bust in the area.

  3. Hobart ! The investors paradise appears to be a potential ground zero for savvy bankers and investors to do their nuts.

  4. Tassie TomMEMBER

    Love Julia Ewert from Perth’s story “we’ve owned this IP for 10 years, never had a problem rolling over the IO until now, couldn’t afford the extra $900/month P&I hence we’re forced to sell.”

    That must suck – paying nothing off your capital in 10 years as you watch the face value of your investment go down and down, paying interest each month for nothing, and then be forced to sell because you can’t afford P&I at about 4.59% interest.

    I wonder how negative her equity is right now?

    • I have been thinking how banks are and might deal with portfolio investors, can’t dump all the properties on the market so can they appoint an administrator. Bankruptcy would mean they have to discover a price through auction, not good for the bank…

      • blindjusticeMEMBER

        In Ireland they created a state body to buy up all the crap from the banks. The state also injected capital into the banks. Anyway this agency, NAMA (national asset management agency) was manned by staff from failed banks. It drip feeds property to the market via hidden sales to Wall St vulture funds. Your average citizen gets no chance.

        Meanwhile the government imports the third world via non EU migration and refugees. Bear in mind the construction industry never recovered after the bubble (for various reasons leading to no supply). Now Rents are insane and while house prices in rural places they are back to stupid levels (the difference now to the bubble era is that rents are more supporting of the prices).

        The contradiction is the taxpayers are on the hook, via NAMA, for the bubble. Its in their interest to get the highest sale price. Its also not in the taxpayers interest to pay extreme property prices. Anyone interested in a possible path that Australia might take should google around NAMA/Rental Crisis Ireland/Refugee Centre arson attacks etc etc. Or go on irish property websites and look at rents in Dublin now and note how many are actually available. Large numbers of third world migrants crammed into houses. here https://www.irishtimes.com/news/social-affairs/tenants-told-to-quit-dirty-and-crammed-dublin-houses-1.3484704
        20 to a house!!

      • BubbleyMEMBER

        Tonyy – I had this conversation with a state manager of one of the big banks about 4 years ago.

        It was Friday afternoon and the drinks were flowing freely. I asked him about the massive mortgages in Oz and what the banks would do if we ended up with foreclosure rates like the USA had. “Would the banks flood the market with mortgagee sales?” He laughed and being a few drinks deep, told me the big banks learned from their mistakes in the 1990’s. The plan was to hold onto the properties and lease them out through RE agents. When the market stabilised they would then sell the properties.

        Its pretty smart really, they get the mortgagee’s deposit and repayments for however long the owner can pay. Then they get a holding income in the form of a rental and when the market starts to swing up, they make a profit. Its a win/win/win for the banks.

  5. How come they don’t look at the Gold Coast? I was told by a mates dad who is in RE there it’s dodgy as hell.

  6. LesleyKMEMBER

    Our story. Different scenario but similar outcome caused by the mining bust. We bought some land in Mackay in 2011, using a redraw on the mortgage on our own home. We then borrowed $250,000 to help fund building an investment house. All-in-all we owed about $520,000, most of which we could claim on negative gearing. Fast forward about 5 years. We made the decision to sell our own house and move back to a more stable area in SE Qld. We applied to refinance with a debt of $350,000 against the investment property. It was declined. A couple of years ago we re-applied to refinance with a debt of $300,000. It was approved, though our credit rating had dropped due to the ANZ’s previous loan rejection, go figure lol. We are still stuck in Mackay and are working towards putting both properties on the market this year so we can get on with our lives. I honestly would never like to see property prices, or rents, at the heights they were during the China Boom. The bigger the boom the bigger the bust. We are pretty resilient, but others are in much worse situations and I fear for the future of many young families in the town who are living with extreme debt.

    • Arrow2MEMBER

      Thanks for sharing this Lesley.

      Also that bit about the credit rating is nuts!

      That said, I think I read somewhere that you can game the credit ratings in some systems to get an artificially high rating by applying for a series of small personal loans and paying them straight back. Hey presto you’re a good risk. Then borrow a f#cken shedload and flee the country.

      No idea if it’s true or if it works for real.

      • I don’t understand, why didn’t it double in 10 years? Hehe.

        It is however nice. $2M is still a lot of coin, despite how nice it is.

    • Stamp duty approx $90k, plus rates, insurance, maintenance, conveyancing, marketing cost and agent commission say 2% plus auction fee and all that interest paid on the $1.2M borrowed over a year and a half of $80K – say $225K all up. Hence the desperate price rise 🤯

      And now on top of the $225K they’ve burnt they’ll wear a capital loss of whatever when reality bites.

      Ouch

    • Arthur Schopenhauer

      Eltham is one summer cinder away from a catastrophic bushfire.

      A house like that would go up in seconds, and there are only a handful of safe escape routes out of the suburb.

      Are you sure you want to live there Gav?

  7. zentaoMEMBER

    I have a little personal experience here.
    Over the weekend i decided to start tidying up my finances so that if prices fall into my budget i am ready to go.
    I did the per-approval for Peachy’s favorite U-Bank. I have 300k in cash and a salary around twice the average. I would be looking to borrow 500K. While the monthly repayments were actually below my current rent, they said that they would refuse the loan.
    Now my expenses were far too honest ( actuals ) as the point of the exercise was to find out what i needed to do to get in line, but i was very surprised.

    • I don’t wish to besmirch you, but I find this really dubious. You’re looking to buy an 800k property with 300k cash, lass stamp, fees, etc, say 250k deposit so >30% deposit. Your earnings are 160k a year, so you’re borrowing just over 3 times your salary.
      I have friends who have just got a 1.6mill mortgage with 400k deposit for a 2mill house.
      I don’t see how you could get refused, unless the bank just wont lend in the area you’re buying.

    • Arrow2MEMBER

      I’ve done the same Zentao. It all boils down to what expenses you put in. I could “get” a loan of either $400K and $1.1m just by putting in very low or very high expenses. (I used the Aussie Home Loans calculator).

  8. proofreadersMEMBER

    How unStrayan – banks flirting with responsible lending for a change?

  9. Tom ConleyMEMBER

    Wouldn’t mind seeing the banks’ internal research backing up these suburb biases!