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Major bank introduces new serviceability probe

by Charbel Kadib5 minute read
Major bank introduces new serviceability probe

Brokers will now be required to document their clients’ post-retirement mortgage repayment plans, with a big four bank updating its credit policy as part of its commitment to “lending responsibly”.

NAB has announced changes to its home loan serviceability policy for borrowers approaching retirement age.

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From Saturday, 25 July, brokers will be required to enquire about and document their clients’ mortgage repayment strategy post-retirement.

After identifying their clients’ planned retirement age, brokers will be required to assess the borrower’s repayment strategy based on specific metrics set out by NAB, which determine the level of “enquiry, supporting documents and verification required to satisfy the policy”.

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For example, if a borrower is over 55 or plans to retire in the next 10 years, the application will need to include:

  • at least one co-applicant under the age of 55 or within 10 years of their intended retirement with “sufficient income to service the home loan at drawdown”.
  • evidence of financial assets worth at least 100 per cent of the loan limit; or
  • evidence of a plan to downsize an owner-occupied home (with at least $200,000 in available equity at drawdown) once the applicant retires.

According to NAB, the new policy is part of its commitment to “lending responsibly” and ensuring that prospective borrowers “understand the potential impact of home loan repayments”, particularly upon retirement.

NAB’s changes are the latest of several revisions to credit policies in recent months, with lenders reducing their risk appetites in response to growing credit quality concerns off the back of COVID-19.

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.

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.

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 0.8 per cent over the past quarter, led by cumulative declines of 3.1 per cent in Sydney and Melbourne.

[Related: Lender ramps up home lending scrutiny]

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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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