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Lender ramps up home lending scrutiny

by Charbel Kadib5 minute read
Lender ramps up home lending scrutiny

COVID-induced crackdowns on home loan serviceability have continued with yet another lender reducing its risk appetite.

BOQ Group (includes Virgin Money) has revised its credit policy for home loan applications as part of its “ongoing commitment to responsible lending”.

The bank has informed brokers that effective immediately, it will undertake “more thorough reviews” of mortgage applications from borrowers with a debt-to-income ratio (DTI) – total debts divided by gross income – that exceeds 6.

Brokers submitting loan applications with a DTI ratio greater than 6 will now be required to provide “detailed supporting notes”, which substantiate the funding request.

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BOQ is the latest of a number of lenders to lower its DTI threshold, joining the likes of ANZ and Teachers Mutual Bank Ltd (TMBL). 

The non-major bank has also made changes to its minimum nominal rental requirements for mortgage applications.

Effective for all home loan applications (including top-ups) submitted from 20 July, BOQ will include a minimum nominal rental figure of $650 per month in its serviceability assessment.

These changes have come amid growing credit quality concerns linked to the economic fallout from the COVID-19 pandemic.

S&P Global Ratings is forecasting an 85 bps increase in credit losses across the Australian banking sector’s loan portfolio in the 2020 financial year (FY20).

The 85 bps increase, which is expected to moderate to 50 bps in 2021, amounts to approximately $29 billion in gross loans, nearly six times higher than the record low in FY19.

According to the Australian Banking Association (ABA), COVID-induced uncertainty has pushed approximately 800,000 borrowers into loan deferral arrangements, over 61 per cent of which are mortgage-holders.

Investment management firm Morgan Stanley estimates that approximately 20 per cent of such borrowers would default on their debt, triggering a $4.3-billion rise in credit losses across the big four banks alone.

The ABA recently announced that banks would extend repayment holidays for up to four months for distressed borrowers unable to service their loan upon the expiry of their initial deferral periods (most of which expire in September).  

However, Morgan Stanley analyst Richard Wiles has warned that loan deferral extensions could “require a reassessment of COVID-19 overlays”.

Mr Wiles acknowledged that repayment holidays could “mitigate risks to the economy” by “avoiding unnecessary hardship and foreclosures”, but noted they would also extend the credit loss cycle, which he said would now be more likely to peak in the second half of the 2021 financial year (2H21).  

The analyst added that the extensions would “drive higher probability of default”, and “higher expected loss” in the internal models of Australia’s banks, “even where default is avoided”.  

Constraints on borrowing capacity and growing credit quality concerns have eroded demand for new housing finance over the past few months. 

According to the Australian Bureau of Statistics’ latest Lending Indicators data, the value of home loan approvals plunged 11.6 per cent (seasonally adjusted terms) to $16.4 billion in May – the largest fall in the history of the series.

This followed a 4.8 per cent decline in April, which was the sharpest fall since May 2015.

[Related: Bank ceases lending to expats]

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Charbel Kadib

Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

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