Borrowers face tougher lending from major banks
We began to experience stricter bank lending last year, but 2016 looks like it’s going to be another tough year for lending as major banks have slashed thousands of dollars off their loans to home buyers, as property prices begin to weaken.
But it’s not just owner occupiers that are affected. Investors looking to purchase an investment property are also facing reduced loan sizes than this time last year. According to calculations by mortgage broker Homeloanexperts.com.au, a couple with a combined income of $120,000 looking to purchase an investment property will be receiving $80,000 less from a major bank compared to last year, whilst owner occupiers with the same combined income would see a loan reduction of $65,000.
During 2015 tighter bank credit policies were introduced along with regulators’ concerns that mortgage lending had become too risky and this has impacted today’s “borrowing power” which has significantly declined since a year ago.
The slowdown of the housing market is also another significant reason for the tougher policies and tighter lending conditions, especially as property prices in Sydney and Melbourne have declined and both cities are experiencing lower auction clearance rates. According to the latest data from Corelogic RP Data, Sydney property prices fell by 1.2 per cent in December 2015 while national house prices remained flat.
In 2014 the rate of growth was 8.5 per cent for the calendar year, whilst for 2015 this had slowed to 7.8 per cent, whilst national house prices have not fallen since 2012 where the property boom commenced.
Looking at figures from some of the major banks, where a couple earned a joint income of $120,000, Commonwealth Bank last year would have lent the couple $640,000 on an investment loan, whilst today this has fallen by $80,000 to $560,000.
Those using Westpac are slightly better off where a year ago they could have received a loan for an owner-occupied loan for $645,000, whilst today this has fallen by $65,000 to $580,000.
A couple in Sydney today with a joint income of $120,000 would therefore struggle to purchase a property to live in or an investment property in Sydney with a loan of just $580,000, where the median property price is approximately $915,000, compared to $760,000 in Melbourne and $518,000 in Brisbane according to Corelogic RP Data.
They would either need a larger loan from another bank, look for more affordable suburbs in western or southern Sydney or invest interstate in Melbourne or Brisbane where property prices are more affordable than Sydney. Or just hold off buying a property altogether.
According to Mortgage Broker, Christina Parnham, the reason for the loan reduction is mainly due to banks assessing how borrowers would cope when interest rates increased, even though the interest rate actually fell to its lowest levels during 2015. It is expected though that interest rates will increase, but probably later on this year.
She says, "You're going to have to be able to service the loan at about 7.5 to 8 per cent".
Banks are becoming tougher in order to protect themselves and taking on a more conservative approach to how much money customers actually require to live on. More sophisticated indexes and tests are being used to measure this as well as some banks are looking more closely at individuals’ specific circumstances to assess their spending patterns.
But don’t lose hope just yet. If you are looking to buy an investment property, your first home or your next property then it is important to shop around first for the best deal to suit you, which might not be with one of these major banks. It’s not just about who will lend you the most money, but how reputable the company is and the conditions attached to the loan to suit you as you will be the one repaying it.
You should also consider ridding yourself of any debt that you might have and cutting up those credit cards so that you can show a lender if questioned how you spend your money, what debts you currently have and how much money you can save and live off.
There are still some lenders that are offering 95% LVI or at least 90% LVI. If however you are struggling to find a lender, then make sure you speak to one of our Property Consultants at iBuyNew who will be able to point you in the right direction. We have a number of mortgage brokers who will be able to assist you. Give us a call today on 1300 123 463.
Published on 11th of January 2016 by Marty Stanowich