Consumers finding it more difficult to get home loans

Why is it becoming harder to take out a mortgage in Australia?

For many consumers it is becoming more difficult to get a home loan and high levels of household debt may be the reason behind it.

Australian’s are currently carrying the second-highest level of household debt in the world thanks to a decade of housing prices rising, low interest rates and relatively easy credit.

Some problems with the lending culture arise because many  brokers are required to meet tough lending targets and some staff are threatened with dismissal if they do not meet the banks’ requirement to sign up more mortgages. It is known that all big banks have performance targets, and ANZ chief Shayne Elliot has conceded the need for further reform, as he said, “We’re accountable for the lending, but for future reform we need to look at the way that the broking industry is also compensated”.

 A staggering statistic that Australian banks now hold at least 60 percent of their loan assets directly to housing has led to growing concerns amongst economists that any downturn in the housing market may have considerable impact on banks and the wider Australian economy.

What could this mean?

Finance data analyst Martin North has said this “perfect storm” of issues coming together is unprecedented in his life time, as he notes “We’ve got very high household debt. We’ve got very high house prices. We’ve got households in some degree of difficulty already. You only need a small consequential change, a small increase in the cost of fuel for example, to be able to really create that pain point.”

Another economist and former banker Sayiyajit Das, has voiced his concern over the 60 percent exposure to mortgage debt, claiming it is “extremely high” and at least “20 percent higher than Norway and also Canada, which has a very comparable economy to Australia”.

Australia now has a household-debt-to-income ratio of 190 percent, meaning for every $1 of household income, there’s nearly $2 of debt.

Time for change?

This has caused the nations largest lender, Commonwealth Bank, to toughen up on home lending, making it harder for consumers to get a home loan.

CommBank revealed in late November that it will now restrict lending in certain postcodes, and will require more borrowers to take out the very costly lenders’ mortgage insurance (LMI).

The changes include a reduction in the maximum loan-to-value ratio without LMI from 80 to 70 percent in certain postcodes, meaning that borrowers may now have to put up a 30% deposit, which for many may prove too costly.

Home Loan Experts’ managing director Otto Dargan said these changes would impact many borrowers and that “we strongly recommend that home buyers don’t commit to buy a property until they have an unconditional approval from a bank”

CommBank have responded saying the changes are a result of responsible lending restrictions put on lenders by regulators to cool the red-hot lending market.

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