Tighter lending conditions in 2019

Tuesday 19 Feb 2019

Corelogic - Cameron Kusher  February 2019:

I suspect that demand has certainly fallen (for mortgages) but possibly it has fallen a greater amount because people are talking to the bank lender or mortgage broker and the feedback they are given is that there is no point applying because with current credit conditions this just isn’t going to get approved.

Looking at it another way, credit conditions remain tighter than they have been in many years. 
Both investor and interest-only borrowers continue to be charged a premium compared to owner-occupier mortgages. Furthermore, lenders are now asking a lot more questions about household expenditure than they have in the past rather than relying on an index of household expenditure.

Although this may be a new normal, in the past, potential borrowers perhaps haven’t had to be so mindful of their expenditure prior to a mortgage application and there will be a period of adjustment to these new conditions.  

In the past borrowers have tended to adjust their expenditure appropriately once they have taken on the mortgage rather than now when the adjustment has to be made prior to obtaining approval for the mortgage.  

Finally, when applying for a mortgage, borrowers are being assessed on their ability to repay a mortgage at an interest rate above 7% while most lenders will offer a new borrower a discounted variable at around or below 4%.  The current cash rate futures yield curve is now suggesting a reduction in official interest rates is more likely than a hike.  In my mind, 7% mortgage rates are a long way off and we won’t be getting back to those levels absent some decent household income growth.

While in isolation these individual changes to credit policy changes may not remove many potential borrowers, the combination of these changes likely results in far fewer borrowers being considered credit-worthy for a mortgage.

Therefore, while application volumes are likely lower, the blame can’t solely be pointed at fewer applications when the process for applying for a mortgage has changed so dramatically over recent years.