Investor borrowers undergo tougher testing by Westpac
With the recent news from the RBA that the official cash rate has been lowered to an all time low of 2 per cent, Australia’s second largest bank, Westpac has decided to apply tougher tests to new property investor borrowers.
These tests will help determine how borrowers would cope when interest rates rise from their current historic low levels, in order to prevent the housing market from overheating.
Before the cash rate cut, Westpac would assess and test how a borrower would cope if mortgage interest rates were to rise to 6.8 per cent. Today this figure has risen to 7.1 per cent.
The APRA has previously warned banks in December last year that unless banks slowed investor credit growth below 10 per cent a year, they would be forced to run larger capital buffers.
According to Westpac chief executive Brian Hartzer, “Westpac had been using a buffer in that case of 180 basis points; we've lifted that to 210 basis points.”
As well as introducing stricter testing, Westpac will also become tougher with its lending to foreign property investors, to help slow the booming growth in investor home loans. Out of all the banks in Australia, Westpac has a large property investor lending, which is increasing at 1.5 per cent per annum.
An interest rate “floor” of 7.1 per cent is also being introduced by Westpac, which is how low the rates used in stress-testing can fall, even if the RBA cuts the cash rate even further. Any investor borrowers looking to take out a loan now will have to prove to Westpac that they could manage the mortgage repayments if interest rates rose to 7.1 per cent.
By having stricter testing in place, this will help reduce the risks in property from speculative buying and a speculative rise in housing prices. It will also aid investor borrowers to ensure that they can realistically afford to repay a loan when times get tough and that they do not overstretch their budgets.
Published on 7th of May 2015 by Marty Stanowich