Banks' lending practices are changing - Harvest Financial Group

Interest rate announcement – November 2016

Today the Reserve Bank of Australia met to review the official cash rate. After cutting rates in August, the RBA have decided to leave rates on hold at 1.50% again this month. We expect that most lenders will leave their rates unchanged, in line with the Reserve Bank’s decision.

Banks’ lending practices are changing

As discussed in some of our previous newsletters, banks have recently been tightening their lending standards and this is having an impact on the amount they are willing to lend to prospective buyers. This includes: increasing the minimum living expenses used in assessing the serviceability of a loan, increasing the interest rate at which the loan is assessed and considering a lower percentage of rental income for income assessment purposes.

Most recently, lenders have introduced caps to limit the maximum amount they will lend in certain suburbs. Typically, there are two types of suburb based restrictions that are starting to be imposed.

1. Maximum Loan to Value Ratio (LVR)

Lenders have begun to apply customised maximum loan to value ratio caps to certain suburbs. These are suburbs that lenders have identified as higher risk due to the potential for substantial variations in price. In these suburbs, the lender will often set a maximum LVR of between 70% and 80%, meaning that borrowers must either increase their deposit amount or reduce the amount they are looking to borrow in order to secure a loan. Often these suburbs are in regional areas, however, there are a number of capital city postcodes that are starting to be included. The specific suburbs impacted differ from lender to lender.

2. Maximum total dollar amount of loan

Lenders are starting to identify postcodes in which they will only lend up to a specific maximum dollar value. This dollar amount will typically be lower when the loan to value ratio of the borrower is above 80%. The maximum dollar value will increase as the loan to value ratio of the borrower reduces (i.e. a higher maximum dollar value will be offered to a borrower with a 75% LVR as opposed to a borrower with an 85% LVR). This is because a lower LVR represents a lower risk to the lender.

As the changes are relatively recent and in many cases, still being progressively developed by lenders, prospective borrows will not only need to be aware of how much they can borrow in general, but also whether this amount will be different if they were to purchase a property in a specific suburb. We can assist you to determine if you will be impacted by this provision.

In all cases, we recommend getting pre-approval from a lender before making an offer to purchase a property. This will help ensure that you are not caught out.

At Harvest, we can assist you to obtain pre-approval for the loan you require to purchase a property. Please call us to discuss should you require assistance.