Stricter lending criteria leaving mortgagors ‘trapped’

Financial services comparison site Mozo has claimed that there is a growing league of “mortgage prisoners” in Australia who are unable to negotiate or refinance their home loans due to tighter lending criteria around income and expenses.

“A mortgage prisoner is a home owner who is unable to move to a more competitive mortgage deal, even if they’ve met every repayment, because they would not pass new affordability tests applied by the banks,” Mozo's property spokesperson, Steve Jovcevski, said.

“Typically, this is because they took out the loan before stricter lending rules applied.”

These borrowers are also “vulnerable” to any interest rate hike that is set by their banks, the comparison site said.

Mozo acknowledged that the rationale for introducing stricter lending criteria is “good” given high levels of household debt in Australia, among other factors, but it argued that the restrictions have inadvertently caused more borrowers to experience mortgage stress. At present, there are nearly one million Australians experiencing such stress, according to the comparison site.

The issue is compounded by poor income growth, which was 0.7 of a percentage point in the three years leading to December 2017, rising costs of living and declining house prices across Australia’s capital cities, Mozo noted.

“The flow-on effect is 30 per cent of owner-occupier borrowers are now finding themselves facing mortgage stress, and many are also falling into the mortgage prisoner category,” Mr Jovcevski said.

“The sad reality is borrowers who need competitive mortgage rates to stay financially afloat are most likely to be mortgage prisoners.”

While no definitive number has been provided, Mozo’s data analysts have estimated that there are “thousands” of borrowers that fall into the category of “mortgage prisoners”.

The number is expected to grow as banks continue to raise their interest rates due, in part, to higher wholesale funding costs.

“With the big banks under the same funding pressure as smaller lenders, more hike rates are imminent,” Mr Jovcevski said.

According to Mozo, the growing population of mortgage prisoners is partly a result of banks previously applying a “one-size-fits-all” approach to assessing a borrower’s income and expenses. “Modest” expenses had been estimated regardless of the borrower’s income, which led to “inflated amounts being lent to hopeful home buyers”.

The comparison site presented the following example to demonstrate how borrowers can become “trapped” by tighter lending criteria:

• A couple with one child and a dual income of $120,000 purchases a home in 2013, borrowing a total of $800,000. Their monthly repayments are $4,295, which leaves them $3,680 to manage their other expenses.
• Fast-forward five years, the couple has a combined salary of $129,000 and they’ve had another child. They’re still paying the same amount each month, have $734,600 left to pay off, and would like to refinance to another bank that’s offering a rate of 3.8 per cent rather than staying with their current uncompetitive home loan rate of 5 per cent.
• When they first applied for their loan, the bank used a poverty line index to estimate their costs ($3,276 per month), with a buffer of 1.5 per cent to ensure the couple could meet their repayments if rates increase. The bank now uses their actual monthly expenses which they’ve assessed as being $4,000 per month, and applies a 2 per cent buffer to safeguard themselves against rate rises. With the new criteria, the couple could only borrow $680,000, so they do not have the ability to refinance their loan, leaving them at the mercy of any rate hikes from their bank.

Living expenses crackdown

Following the suggestion during the banking royal commission that ANZ was “non-compliant with the National Credit Act, responsible lending obligations and with regulatory guides issued by ASIC” by not verifying “inconsistent” living expenses, many lenders have been tightening up their credit policies around expenses and benchmarking.

Earlier this month, Commonwealth Bank notified mortgage brokers that it will be looking closer at living expenses on loan applications, as reflected in its updated loan application form containing 11 categories of expenses. It had already brought in new debt-to-income measurements for borrowers earlier this year.

Westpac also updated its expense guidelines, requiring borrowers to provide documentation at an “itemised and granular level” across 13 different categories and include expenses that will continue after settlement as well as debts with other institutions.

ANZ followed suit, telling aggregators at the end of last month that it would be making changes to its minimum living expense values. It warned brokers to ensure that an “accurate reflection of the customer’s financial position is presented”.

Mortgage brokers have expressed frustration over the increasing interrogation of living expenses, suggesting that it is an “overkill”, while also lamenting that the increasingly impractical nature of bank credit decisions could be detrimental to borrowers over the next three years.

On the other hand, some companies have been capitalising on the changing appetite of lenders, launching new products to help brokers with their expenses checks. For example, CashDeck’s Credit Ready tool enables brokers to retrieve clients’ bank statements and provide a detailed living expense analysis, while the Opica Group’s AI-powered expenses verification engine, RELIE, aims to help “protect any broker or lender from a breach of their responsible lending requirements”.

[Related: Analysis: When regulation creates mortgage ‘prisoners’]