If you’re in the hunt for a home loan,
you may have noticed the market has rarely been as varied as it is
today. The simpler days of the First Home Owners Grant under Howard are
long behind us.
For one, figuring out whether you’re going to be an investor or owner
occupier is easier said than done. It may sound strange, but it’s a
question that growing numbers of investors have been asking themselves
of late. In this day and age, with stricter investment lending
standards, it’s become more commonplace.
At the same time, it matters now more than ever what you bring to the
table as a borrower. Banks are favouring those who can come equipped
with heftier deposits. And there’s a good reason for that.
You may remember that lenders targeted investors last year by raising interest rates.
They did so on two separate occasions. And it came as a response to
APRA regulations. The prudential regulator forced banks to limit
investment lending growth to 10%.
To compensate for this loss of business, banks turned their attention
to owner occupiers. There was even a period where owner occupier
lending was outpacing investment lending. So much so that banks
eventually raised home loan rates for owner occupiers too.
But we’re now seeing yet another crack appear in the home loan
market. Only this time, it’s not a split between investor and owner
occupier lending. What we’re seeing taking place is a divide in how
lenders treat owner occupiers.
Banks have started offering lower home loan rates to borrowers that
have larger deposits. The big winners are those individuals who can put
down at least a 20% deposit. The losers are those that can’t. Who may
even find themselves paying higher rates than they would otherwise.
Up to now, deposits mattered in determining how much a borrower had
to pay back over the course of a loan term. It held little importance in
deciding what rates banks slugged borrowers with. For example, say you
had a $100,000 deposit. You wanted to borrow $500,000 over 30 years.
Compared to someone with a $40,000 deposit, your monthly repayments
would be much lower. But the interest rate of those loans would remain
the same. The difference now is that these changes are affecting the
rates banks offer to customers.
So banks have become far more selective in choosing to whom, and how, they lend. As the Sydney
To be fair, deposits still matter much more for investors. But the
fact that banks are applying such measures to owner occupiers is
telling. It proves that banks are trying to win customers in such a
competitive market. But it also shows they’re prioritising lower risk
borrowers.
What lenders are now doing in this owner occupier market might leave
you feeling miffed. After all, should double standards apply to
borrowers who just want to live in their homes? At any other time in the
past few decades, the answer would be no. But the more you think about
it, the more it makes a certain degree of sense.
Everyone’s aware of the uncertainty surrounding the Australian economy.
Property values have shot up beyond the means of most households. Wages
are barely growing at 2% (some six times lower than median national
house prices). Throw in China’s slowdown, weak commodity prices, and
general market volatility, and there’s real cause for concern.
One of the key reasons we’ve avoided a recession up to now is down to
the stability of the housing sector. We need to take care to ensure
that it remains that way. One of the easiest ways of doing this is to
make sure banks lend sensibly.
In order for that to happen, banks should take things up a notch.
They should apply even stricter lending standards for all home loans. At
the least, lenders should take the same approach to owner occupiers
that they have with investors. A 0.03% rate hike for owners with less
than a 20% deposit is a start, but it’s a measly one. They can raise
rates a lot more than this.
All groans aside, tailoring loan terms to individual borrowers makes
sense. It not only helps put the brakes on the rising house prices
across the market. But it should also ease concerns about the impact of
both a housing crash and a potential recession.
Banks are lowering home loan risk, but want more business
Of course, banks aren’t doing any of this because they care about the
state of the housing market. The reason why these measures are in place
is to benefit banks first. Tailoring home loans is primarily a way of
attracting new customers. That’s how the banks see it, anyway. If
regulators won’t let them expand investment loan books, they’ll look
elsewhere.
But if banks want more business from owner occupiers, why not lower
home loan rates for all owner occupiers? Well, banks aren’t stupid. They
still have balance sheets and reserve ratio requirements to think
about. They know regulators would be all over them if they eased lending
standards too much.
From a lenders point of view, it makes sense to tailor interest rates
on a case by case basis. It’s not only a way of attracting new
customers they might otherwise have lost to competition. It’s also a way
of making them look like they’re being prudent with their lending. And,
if nothing else, it should ensure more stability across banks’ home
loan balance sheets.
Banks know, better than anyone, that low risk borrowers are the best
kind. They’re the least likely to default on loans. Not only because
they’re borrowing (and repaying) less. But because larger deposits
suggest they’re in a strong financial position.
Why banks should raise the stakes in raising lending standards
The only problem is these lending measures still don’t go far enough.
At the least, banks should become even more rigorous in assessing
borrowers.
Everything from deposits, to credit histories, to debts, to income
histories should count. Yes, banks already look at all these things. But
every single factor should have a bigger bearing on a borrowers’
worthiness. That may seem draconian and unfair. But the benefits should
outweigh the downsides in the long run.
Whether banks would be willing to do this is another matter
altogether. After all, they’re tailoring home loan rates as a way of
winning more business, not less. Nor are they too concerned about how
their lending distorts the housing market. So it may be that we need
more regulatory oversight for lenders to start thinking this way.
Either way, one thing is clear. Making it even harder to qualify for
loans would ease pressures on the housing market. And it should help
lower house prices in the long run. That would also help with housing
affordability. In turn, it could also result in lower lending
requirements in the future.
In any case, with the issues plaguing the Australian economy,
the path ahead is clear. Home loan lending standards must become even
more stringent. At present, the differences between newly tailored owner
occupier loans remains fairly small. Yet if we’re serious about keeping
some semblance of stability in the market, there’s scope for banks to
take things much further.
Until then, house prices are likely to keep growing, albeit at a
slower pace than last year. The Commonwealth Bank recently forecast
growth of up to 2% in Sydney and Melbourne this year.
The Daily Reckoning’s property expert, Phillip J. Anderson,
agrees that house prices have yet to hit their peak. In fact, he says
we’re heading into another boom that could last a decade.
Phil’s 20 years of experience as a property analyst and advisor has
given him a keen sense for where the property market is, and where it’s
going. He predicted the housing market crash in 2008. And he went
against the mainstream in 2009, saying house prices would continue to
this decade.
He was right on both accounts.
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