The Home Loan Risk Making Property Experts Lose Sleep

• At the peak of the recent housing market surge, close to a quarter of new loans were deemed to be risky. 

• This is no longer the case, as rising interest rates have restricted the amount of money home buyers can borrow, leading to fewer of them taking out large loans relative to their incomes. 

• People who purchase the property before and are paying are worried that they will soon face a mortgage cliff.

Insights from recent data suggest that the proportion of risky lending has decreased due to the difficulty in obtaining large loans relative to incomes brought on by rising interest rates.

However, worries lurk for recent house buyers who took out loans at historically low fixed interest rates and may have to refinance next year, which will result in higher mortgage payments.

With the real estate market becoming expensive, home loan sizes have come under scrutiny.

Nearly 25% of borrowers for new homes during the real estate boom took on mortgages that were six times or higher than their wages.

According to data from the bank regulator Australian Prudential Regulation Authority, the share of new lending with high debt-to-income ratios has decreased 7.2 percentage points from its peak in the December quarter of last year to 17.1% in the September quarter of 2022.

Josh Frydenberg (Then-treasurer) encouraged regulators to crack down on high-debt house loans while prices were increasing last spring but interest rates were unlikely to rise for years.  The cash rate rose sooner than expected in May and reduced the amount of money that home buyers could borrow.

AMP Capital chief economist Dr Shane Oliver said the fall in risky lending was good news. 

He said, “Last year, in the midst of the property boom, there was a concern that people were taking out more risky loans, given the surge in prices”. 

It compelled the banks to determine whether borrowers could repay their loans in the event that interest rates increased to 3% from the prior test of 2.5%. 

At this time, there were speculations that the central bank should raise interest rates, but it was perceived as premature. Other instruments were considered for cooling off the real estate market.

As things started to move quite swiftly towards a significant increase in interest rates, they didn’t have to implement any additional macroprudential measures.

At higher interest rates, regardless of the same income, one can’t borrow as much money so the loans wind up being lower in comparison to people's earnings. Oliver claims that the decreasing real estate costs were also assisting in lowering the amount of money buyers need to borrow in order to buy a home.

The biggest risk according to the regulator is not today's borrowers who are limited in how much they can borrow because they have to face higher interest rates. Instead, they are worried about the existing borrowers, especially those with ultra-low fixed rates over a previous couple of years.

We increased rates by 3%, so anyone taking out a loan starting in October of last year with a variable rate would be exceeding the serviceability test's upper limit. Before then, everyone who had borrowed would have exceeded it.

He claimed that while unemployment is still low, the regulator may not be very concerned at the moment. However, if unemployment starts to increase, this situation may change.

According to Theo Chambers, Chief Executive of Shore Financial, many homebuyers are still attempting to borrow as much as they can, but banks are reluctant to make huge loans. People are still borrowing six times their income using every trick in the book to convince the bank to lend.

Of course, banks make you go through a lot of hoops, and right now more so than ever. According to him, some banks are changing how they calculate money received in the form of bonuses or how they account for the rising cost of living.

Banks are unquestionably becoming a little more cautious.

Chris Foster-Ramsay, the principal broker at Foster Ramsay Finance, claimed that since the regulator put pressure on lenders, borrowers are less likely to take out huge loans compared to their salaries.

The issue of excessive loan sizes was resolved by rising interest rates but also decreased borrowing ability.

As the rates go up, borrowing capacity goes down. Debt-to-income ratios are typically not a problem because rates rise, borrowing capacity declines, and so on.

They still want to borrow as much money as they can to buy a home close to their families, their favourite stores, or their children's schools; they don't want to leave the neighbourhood. That hasn't altered in the previous six to twelve months.