The major bank and its subsidiaries have made changes to their residential lending policies, including tighter serviceability measures for self-employed borrowers.
Westpac and its subsidies (Bank of Melbourne, BankSA and St George Bank) have informed brokers that effective from Monday, 3 June, major updates to the group’s residential lending policy will be implemented, including:
- changes to serviceability assessments for self-employed applicants
- changes to the way the HEM band is determined
- changes to the assessment of a maximum loan term
- new “contract of sale” requirements
Changes to serviceability assessments for self-employed applicants
As part of a move to ensure Westpac “continues to responsibly and sustainably meet its customer, community and regulator expectations”, the group has updated its mortgage application requirements for self-employed borrowers.
All self-employed applicants will be required to provide two years of personal tax returns and ATO notices of assessment, as well as financials (profit and loss and balance sheets) for all entity types – with the exception of applicants that meet the Medico eligibility criteria.
The way Westpac assesses self-employed income is also changing, with the group to review income from both years and use the average if the most recent year’s income is higher. However, if the most recent year’s income is lower, Westpac will use that figure for its assessment.
Additionally, if a borrower has an annuity, private pension or superannuation income stream, Westpac will use 100 per cent of the income types for serviceability.
The income documentation that borrowers provide will also need to include either the term of the payment or the fund balance.
As a result, HEM (Household Expenditure Measure) tables will be updated, with Westpac adding that in most instances, HEM values will increase.
Changes to the way the HEM band is determined
Further, Westpac will permit undistributed company profits to be used towards an individual’s serviceability calculations, with the additional income to be used to determine the individual’s HEM band.
Westpac used the example of an applicant whose personal tax return indicates they have an income of $50,000 per annum, stating that if there is an additional $50,000 per annum of undistributed company profits being used for the serviceability calculation, the HEM band would be based on the combined $100,000 of income.
Changes to the assessment of a maximum loan term
The group also stated that it has updated its “Assessing Maximum Loan Term” policy in order to “better understand” a customer’s loan exit strategies.
As part of the changes, brokers will be required to capture the borrower’s loan exit strategy during the “Requirements and Objectives” conversation for applicants aged 45 years or over at the time of application, or those who will be aged 75 years or over at the completion of the loan term.
The group noted that if the loan exit strategy is from a “non-real estate asset”, such assets must be verified.
Superannuation exit strategies will also be expanded to include a requirement that the borrower’s retirement age exceed the ATO preservation of super age.
New ‘contract of sale’ requirements
Finally, Westpac has informed brokers that in order to ensure it “maintains the accuracy of security assessments”, a contact of sale without additional validation will no longer be acceptable.
Westpac will require an automated valuation model or the next appropriate valuation type completed as the security assessment for all purchase of properties.
Westpac’s tightening measures have come amid an announcement of the Australian Prudential Regulation Authority’s (APRA) proposal to loosen serviceability requirements for home loan applications.
APRA has proposed to scrap the 7 per cent interest rate floor for mortgage applications and increase the interest rate buffer to 2.5 per cent.
APRA chair Wayne Byres said the operating environment for ADIs had evolved in the past decade, prompting APRA to review the ongoing appropriateness of the current guidance.
In response to APRA's announcement, a Westpac spokesperson told The Adviser: “Westpac welcomes APRA’s consultative process. Westpac recognises that it’s our responsibility to find the right balance that appropriately supports customers to buy homes and protects the quality of the bank’s mortgage book.”
APRA is now seeking to amend the Prudential Practice Guide APG 223 Residential Mortgage Lending, in which the serviceability guidance appears