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Bank ceases lending to high DTI borrowers

by Charbel Kadib10 minute read
Bank ceases lending to high DTI borrowers

A lender has further reduced its risk appetite amid the ongoing COVID-19 crisis, announcing it will no longer process home loan applications from borrowers with high debt-to-income ratios.

BOQ has informed brokers that effective immediately, it will cease lending to home loan applicants with a debt-to-income (DTI) ratio – total debts divided by gross income – exceeding 8.  

The non-major will also cease processing applications from non-PAYG borrowers with a DTI ratio greater than 6.

PAYG applications with a DTI ratio greater than 6 will continue to be processed, unless the loan-to-value ratio (LVR) exceeds 80 per cent.

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BOQ noted that applications submitted prior to 10 August will be “considered in line with earlier advice”.

This comes just weeks after BOQ announced that it would undertake “more thorough reviews” of mortgage applications greater than 6 by referring such applicants to its risk assessment team.

Brokers submitting loan applications with a DTI ratio greater than 6 are required to provide “detailed supporting notes” that substantiate their clients’ funding request.

BOQ’s changes are the latest among several serviceability policy revisions across the marketplace amid mounting credit quality risks associated with the COVID-19 crisis.

Most recently, NAB announced it would now require brokers to enquire about and document their clients’ mortgage repayment strategy post-retirement.

AMP Capital chief economist Shane Oliver has warned that recent adjustments to serviceability requirements could have unintended consequences.

Mr Oliver explained that tighter lending standards could further weigh on demand for housing, already subdued off the back of income loss and immigration restrictions.  

“If you go back to the time of the GFC in the United States, there were very [loose] lending standards up until 2006-2007, and then the tightening in lending standards that occurred once prices started to fall exacerbated the downswing,” he told The Adviser’s sister brand, Mortgage Business.

“It has the very effect they’re trying to avoid.

“That could well happen here, that tightening by the banks exacerbates the downswing and then ultimately causes more weaknesses in the economy, which then [leads] to more forced selling of houses and puts more downward pressure on prices.”

He concluded: “If the banks tighten their lending standards, you end up with a double whammy in terms of reduced demand.”

COVID-induced weakness in demand for housing has already triggered falls in national home values.  

According to the latest data from property research group CoreLogic, national home values have fallen 1.6 per cent over the three months to July, led by combined cumulative declines of 5.3 per cent in Sydney and Melbourne.

[Related: Lender ramps up home lending scrutiny]

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