Over 25% of mortgagors wouldn’t qualify today: HashChing

“Lenders are tightening their credit policies and shining an unprecedentedly harsh spotlight on applicants’ living expenses,” HashChing COO Siobhan Hayden said.

The majority of brokers who responded to the survey expressed the belief that prospective borrowers are struggling to secure mortgages because banks are reviewing their actual expenses, rather than using the traditional household expenditure measure method.

“Reviewing a loan applicant’s living expenses is a rational metric to assess suitability for the loan, and doing so should provide more protections for both banks and borrowers,” Ms Hayden said.

“However, combing through living expenses is having an adverse effect on existing home owners who would not qualify for their current mortgage today. This leaves them unable to refinance and stuck with their existing rate.”

Lenders have been tightening up their credit policies around income, expenses and benchmarking in recent months against the backdrop of an ongoing financial services royal commission, which highlighted many cases where non-qualifying loans were approved, only to end up in default.

Commonwealth Bank notified mortgage brokers that it would be looking at 11 categories of living expenses on loan applications, while Westpac updated its expense guidelines, requiring documentation at an “itemised and granular level” across 13 categories. ANZ followed suit, cautioning brokers to ensure that an “accurate reflection of the customer’s financial position is presented”.

While the banks are under regulatory pressure, at the other end, mortgage brokers have expressed frustration over the increasing interrogation of living expenses, saying that lenders are palming off responsibility to brokers. The Australian Securities and Investments Commission had also said that lenders shouldn’t offload blame to third parties when a loan is found to be in breach of responsible lending obligations.

Ms Hayden questioned whether the enhanced scrutiny of living expenses would ultimately drive better consumer outcomes or inadvertently help lenders maintain high interest loans.

“The reality is, it has become a lot harder to secure a new home loan or refinance an existing one. Banks are scrutinising everything, whether it’s how much borrowers are spending on tolls, Netflix, or ASOS. Those wanting to get ahead and buy a home or refinance need to be proactive and seek financial advice from a verified expert that understands the recent changes to lending,” the HashChing COO said.

Similarly, another study by financial services comparison site Mozo found that there is a growing league of “mortgage prisoners” in Australia who are unable to negotiate or refinance their home loans due to tighter lending criteria around income and expense. These borrowers are also “vulnerable” to any interest rate hike that is set by the banks.

Mozo acknowledged that the rationale for introducing stricter lending criteria is “good” given high levels of household debt in Australia, among other factors, but it argued that the restrictions have inadvertently caused more borrowers to experience mortgage stress. There are nearly one million Australians experiencing such stress, according to the comparison site.

Further, HashChing’s latest survey found that at least half of its brokers’ refinance clients paid a higher interest on their original mortgage due to not shopping for better deals, while over two-thirds of brokers indicated that they hadn’t noticed a trend towards existing mortgagors refinancing for fixed rates.

While studies do not paint a consistent picture of borrower demand for fixed rate loans, recent out-of-cycle rate hikes by non-major banks, and most recently by the first major bank Westpac, could have an impact on demand in the upcoming months, according to broker at Your Mortgage Provider Melissa Mascioli.

[Related: Fixed rates could be making a comeback: Mortgage Choice]