Landing a home loan has become easier since the banks eased their lending stress tests for potential borrowers.
The Australian Prudential Regulation Authority no longer requires lenders to ensure customers can repay home loans at a minimum 7 per cent interest rate. Instead, lenders can now use a buffer to ensure borrowers can repay their loans if interest rates were at least 2.5 percentage points higher than the advertised rates.
This has not only resulted in an increase in the number of mortgages but also the size of loans, according to BCP Finance Chief Executive Brett Hartwig.
“In some instances you are taking off 2 per cent from the assessment rate, so that has a substantial impact on a person’s capacity to borrow and service a loan,” Mr Hartwig says.
Mr Hartwig says a shift away from the rigid Household Expenditure Measure (HEM) criteria to estimate a would-be borrower’s living expenses has also had a big impact on the willingness of lenders to approve home loans.
“There wasn’t enough flexibility and understanding of discretionary and non- discretionary expenses under the HEM assessment,” Mr Hartwig explains.
“It was a very black and white assessment. If you were a husband and wife and two kids there was a standard cost of living assigned to you, regardless of whether you were a household on $100,000 a year or $500,000 a year.
“But financiers are now taking a much more common sense approach.”
Recent Australian Bureau of Statistics mortgage data suggests the latest loosening of lending criteria, along with interest rate cuts and the passing of federal election jitters, is having an impact.
The data shows there was $26.5 billion worth of home loan commitments in July, the second consecutive month of increases. This was a 5.2 per cent rise from June, the largest monthly increase since March 2015.
The $26.5 billion in home loans was split between $19.3 billion for owner occupiers and $7.2 billion for investors, with most of the increase coming from new mortgages rather than refinancing of existing loans.
The number and share of mortgages for first-home buyers was also up. Their 10,136 mortgages in July represented a 29.4 per cent share of all new owner occupier loans.
Executive Director of Economic Research at REA Group, Cameron Kusher says the increase in the value of mortgage lending is in line with improvements in home values since the middle of May.
“It does show that interest in the housing market is rising,” he says.
“Auction clearance rates are continuing to rise, as is the volume of stock available for sale, and at the same time lenders are offering attractive mortgage rates for borrowers.
“Given all of this, we would expect that demand for mortgages will continue to climb over the coming months.”
APRA’s directive in June to scrap the 7 per cent loan serviceability floor was the latest move to wind back restrictions it placed on lending during the property boom and against the backdrop of the royal commission into banking.
In December last year, it announced it would no longer require banks to limit interest-only loans to a 30 per cent share of their lending. And eight months earlier, it removed the cap on investor loan growth. The cap was introduced in 2014 and required banks to limit growth in their lending to housing investors to 10 per cent.
Mr Hartwig says that while banks are now more willing to approve home loans, it is still an arduous process and potential borrowers need to ensure they have carefully prepared their applications.
“My advice would be to definitely prepare yourself,” he says. “Take the time to understand the limits that you can and can’t get to and also make sure you are prepared with all your supporting documentation.”
Mr Hartwig says getting professional help to prepare a mortgage application is a smart move.
“Preparation and having people to take you through the process is one thing, but it’s also being able to access the best products and pricing in the market and get the best deal,” he says.
Brett Hartwig founded BCP Finance in 1995. Brett has over 40 years of banking and finance experience and has grown BCP Finance to be an integrated arranger of Residential, Commercial, and Corporate financing solutions. BCP Finance has recently partnered with Brad Teal Real Estate to offer clients access to independent finance solutions as part of the Teal Assist menu of services.