How home lenders keep turning the screw on borrowers
It follows the regulator’s analysis revealing that nearly a quarter of new mortgages had a debt-to-equity ratio of six times or more, which is the level it considers “risky”.
Lenders get tough
The latest policy changes from lenders aimed at tightening terms and conditions for mortgage borrowers include:
- Increase deposits and reduce the amount lenders can borrow;
- Tightening of proof of income, especially for contract and casual workers. For example, many lenders have moved away from using overtime worked or bonuses as proof of ability to pay.
- Replaced the ATO Notice of Assessment, which reflects taxable income after deductions, with the more up-to-date income statement which shows the year-to-date salaries and wages as well as any withholding taxes.
- Updated verification of all loan commitments from “latest statement” to “latest statement dated within 30 days of request date”. Others look at borrowers‘ repayment history for up to two years for all loans, including personal loans and credit cards.
- Provide proof of deposits for all other loans, regardless of loan-to-value ratio.
- Added property location to the living expenses section in the loan application used to review an applicant’s Household Expenditure Measure (HEM), which is used to determine the income available to repay a loan. Big cities, like Melbourne and Sydney, have a much higher cost of living.
Household budgets will continue to be tight as rising energy costs and continued inflationary pressures are expected to push inflation to around 7% later this year, according to the Reserve Bank of Australia.
Exclusive analysis from RateCity, which monitors lending rates, finds the maximum borrowing capacity for individuals and families will decline by around 18% as rates continue to rise.
It shows that a family with an annual pre-tax income of $150,000 with no additional debt and minimal expenses will see their borrowing capacity reduced by more than $163,000, or about 17%.
Reduction in borrowing capacity
The analysis is based on April’s average variable rate of 2.41% and the estimated rate of 4.66% by next April. It assumes that a family of four is looking for a 30-year loan, principal and interest.
For the same family with a pre-tax income of $400,000, the reduction amounts to more than $515,000, or about 18%.
For a single person earning a pre-tax income of $100,000 with no additional debt and minimal expenses, the reduction in borrowing capacity is about $129,000, a decrease of about 17% to about 314 $000 for a similar person earning $250,000.
Other analysts, such as Carlos Cacho, chief economist at investment bank Jarden Australia, estimate that rising rates and pressure on discretionary spending will lead to a 25% decline in borrowing capacity.
Cacho expects house prices to fall by around 20% nationwide with even bigger falls in Melbourne and Sydney, which would be the biggest drop since 1980 when Malcolm Fraser was Prime Minister and the average house price was $76,500.
Explosion of renovation costs
A record boom in home renovations and unprecedented demand for lumber and other building materials are driving up costs by around 80%, and many renovators and those building their own homes are facing even bigger increases.
Lenders for renovations and construction loans are increasing deposits by more than 10% and recently raised lending rates broadly in line with recent movements in the cash rate, says Canstar, which monitors interest rates.
Some renovators are “reeling in shock” as rising material and labor costs are causing originally quoted prices to double, says Yelena Smetannikov, architect at Urban Den Architects in Sydney.
Smetannikov says demand was booming for new kitchens, bathrooms and home offices, which include an extra room for an assistant and audio-visual equipment for video conferencing.
“It’s really difficult for renovators,” she says. “Some are postponing any construction for a few years until the market calms down. They claim it’s not worth it under current market conditions.
Disputes can arise because renovators don’t have a clear idea of what they want or how much they want to spend, which can mean changes midway through a project, says builder Phil Dwyer and national chairman of the Builders Collective of Australia.
Dwyer recommends checking that the builder is a licensed practitioner for the type of work being planned and has a valid home building insurance certificate.
Also check home and contents policy coverage in case additional coverage is needed, he says.
Some renovators are having to apply for new loans because their initial financing isn’t enough to pay revised project costs, warns Anita Marshall, managing director of mortgage broker Advanced Finance Solutions.
“It’s a big headache,” Marshall says, adding that borrowers should either consider a fixed price or borrow extra money as a financial buffer.
Dwyer says builders and renovators must negotiate a “reasonable and fair” solution if rising material prices cause the original price quoted for a renovation to soar.
“Use your negotiating skills to get the best possible outcome to get the project done,” says Dwyer.
“Nobody wins if the lawyers get involved and there is a dispute. Everything freezes for months and months and months and the costs go back to the lawyers.