Changing Property Lending Conditions In Inner City Sydney

July 27th, 2018 - by Brad Gillespie

In the wake of the troubling findings of the Banking Royal Commission, bank lending conditions are changing.

While the changes ultimately better protect consumers, they will have an impact on inner-city borrowers looking to finance a new home or an investment property. We break down what you need to know.

The Banking Royal Commission found numerous instances of banks failing to meet responsible standards of lending and, as a result, their lending practices are now under closer scrutiny. The fallout for consumers is tightened lending restrictions that will make it harder for borrowers looking to secure a loan.

Home loans will be harder to get

Customers whose loan applications are marginal, but who may have squeaked through previously, are now more likely to receive a no. So while the demand for homes has not changed, the loan application process – and the bank’s underwriting policies – has, making it harder for people to be successful in their applications.

Banks have been found to have loan approval processes that rely too much on so-called “benchmarks” of living expenses, without adequate review of a household’s actual expenses or overall debt profile. Lenders will now be scrutinising this information far more closely.

Loans will take longer to get

A more careful assessment process means that loans will take longer to approve. As banks become more conservative in their credit assessments, their requirements of customers will become more complex.

This could result in banks asking more questions of customers and requiring more documentation, such as bank statements proving expenses, in order to get a comprehensive picture of a potential borrowers’ financial position.

Customer may be able to borrow less

The tightening of lending standards and raising of living expense benchmarks may cut homebuyers’ borrowing capacity depending on income. Investment bank UBS has warned that some applicants may see a reduction in borrowing capacity by up to 40 per cent. The majority of home loans are currently assessed against the "basic" Home Expenditure Measure (HEM) benchmark. For a family of four, that is $32,400 a year.

The Australian Prudential Regulation Authority (APRA) has raised an alarm about the over-reliance on this benchmark, saying that banks need to do greater due diligence. The industry is moving toward setting new criteria that meets the APRA’s sound lending practice guidelines.

Investors will face more restrictions

APRA has introduced stricter investor guidelines in response to fears about a property bubble, particularly in Sydney. APRA is calling on banks to keep the annual growth rates of investor lending to 10 per cent or less. Stricter lending criteria, higher interest rates, and the need to have a larger deposit may combine to take the heat out of the investment property market.

Some lenders will cap Loan to Value Ratios (LVR), and the “stress test”, which lenders use to assess how a borrower would cope if interest rates went up, will become harder to pass. Under the new guidelines, some lenders have increased this rate to a minimum of 7.5% interest.

Competition in capital cities may ease

The last quarter of 2017 saw market conditions soften in the price bracket up to $1.5 million in Sydney’s eastern suburbs. This is believed to be largely due to APRA’s tighter restrictions on interest-only lending and tougher borrowing conditions in general for investors.

The good news is that decreased competition within capital cities —particularly in inner city areas popular with investors — may make things easier for those looking to purchase.

If you’re looking to buy or sell in Sydney's inner city contact our team today.