Hypothetical borrowers shine light on lenders’ changes
New research shows the Australian Prudential Regulation Authority’s (APRA) crackdown on investor loans is taking effect with average loan sizes recording a sharp drop.
APRA has increased scrutiny of financial lenders’ practices in recent times in a bid to bolster the nation’s banking system.
To compare how lenders evaluate their clients, APRA created four hypothetical borrowers.
Using the four borrowers, APRA surveyed 20 banks, building societies and credit unions in December 2014 to determine how they evaluate these clients.
To test how lender’s policies had changed in response to APRA’s crackdown on property loans, the watchdog ran a second survey in September 2015 using the same four hypothetical borrowers.
The results found that the maximum loan sizes to property investors dropped 12% on average. Meanwhile, the maximum loan sizes for owner-occupiers dropped 6% on average.
Lenders tighten investor-loan criteria
To determine how different lenders evaluate these four hypothetical borrowers, the survey utilised four data points. These are:
- Borrower’s income
- Living expenses
- Interest rate for the new loan
- Interest rates for their existing loan
Most lenders use these four factors to determine a borrower’s Net Income Surplus (NIS), which is used to determine the serviceability capacity of a borrower.
The research found that lenders were now applying higher interest rate stress tests to existing loans with rates of between circa 5-8% in December 2014 compared to 6-9% in September 2015 – with most typically above 7%.
Many lenders had also raised the borrower’s minimum living expense assumptions, while some lenders applied larger discounts to borrower’s incomes, particularly those on less stable sources of income, such as overtime, bonuses and commissions.
Given the changing financial lending market, investors should engage brokers who specialise in investor loans to ensure they’re optimising their borrowing capacity. Click here to learn more about unlocking equity for your next investment property.