Homebuyers could see their capacity to borrow cut by up to 40 per cent as a result of reforms likely to be driven by the banking royal commission.
Research from investment bank UBS found the expected tightening of lending standards and raising of living expense benchmarks would cut credit availability by 21 to 41 per cent, depending on the borrowers’ incomes.
Currently, about three-quarters of all home loans are assessed against the “basic” Home Expenditure Measure (HEM) benchmark.
For a family of four, that is $32,400 a year, a level below the current old age pension for a couple.
UBS economist George Tharenou said while banks were already undertaking greater due diligence at the Australian Prudential Regulation Authority’s (APRA) behest, the royal commission had established misconduct was more severe than many observers anticipated, and irresponsible lending was already a key finding of its investigations.
“In particular, APRA raised an alarm regarding the over reliance on the HEM benchmark,” Mr Tharenou said.
“This benchmark assumes only a very modest or frugal level of household expenditure — it assumes that a family of four in Sydney has living expense slightly less than the income provided to a retired couple on the old age pension.”
UBS said the “lavish” HEM benchmark of annual expenses at $58,200 was much closer to what the royal commission was likely to recommend regarding banks making “reasonable inquiries” about a customer’s financial position.
“When we re-ran the major banks’ home loan calculators using the higher-living expenses, we found the borrowing limit fell sharply, by 30 to 40 per cent in many cases,” Mr Tharenou said.
Even using the “lavish” HEM for a family of four with a gross income of $100,000 a year, didn’t mean a comfortable existence according to Mr Tharenou, but it was closer to reality than banks’ current benchmarks.
The banks’ relaxed view of household spending often allows homebuyers to borrow more than five or even six times their annual income.
The NAB recently cut its “hard cap” on loan-to-income ratio from eight times income to seven times income.
The higher benchmark would see loan-to-income ratios drop to a multiple of about three to four times, according to UBS numbers.
“This is consistent with lending limits that were considered conservative prior to the housing boom, and is consistent with lending limits generally available overseas,” Mr Tharenou said.