Major bank cracks down on borrowing capacity

ANZ has announced changes to its debt-to-income (DTI) policy for home loan applications, effective for applications submitted from 3 August.

At present, ANZ does not accept home loan applications with DTI greater than 9.  

However, the major bank has informed brokers that as of 3 August, mortgage applications with a total value greater than seven times the borrower’s annual gross verified income “may be deemed unacceptable for ANZ mortgage purposes” and would be subject to “stricter credit criteria”.

ANZ is the latest lender to revise its DTI policy, with Teachers Mutual Bank Ltd (TMBL) reducing its threshold earlier this month from a maximum of 8 to a maximum of 7.

These changes have come amid growing credit quality concerns linked to the economic fallout from the COVID-19 pandemic.

S&P Global Ratings is forecasting an 85 bps increase in credit losses across the Australian banking sector’s loan portfolio in the 2020 financial year (FY20).

The 85 bps increase, which is expected to moderate to 50 bps in 2021, amounts to approximately $29 billion in gross loans, nearly six times higher than the record low in FY19.

According to the Australian Banking Association (ABA), COVID-induced uncertainty has pushed approximately 800,000 borrowers into loan deferral arrangements, over 61 per cent of which are mortgage-holders.

Investment management firm Morgan Stanley estimates that approximately 20 per cent of such borrowers would default on their debt, triggering a $4.3-billion rise in credit losses across the big four banks alone.

The ABA recently announced that banks would extend repayment holidays for up to four months for distressed borrowers unable to service their loan upon the expiry of their initial deferral periods (most of which expire in September).  

However, Morgan Stanley analyst Richard Wiles has warned that loan deferral extensions could “require a reassessment of COVID-19 overlays”.

Mr Wiles acknowledged that repayment holidays could “mitigate risks to the economy” by “avoiding unnecessary hardship and foreclosures”, but noted they would also extend the credit loss cycle, which he said would now be more likely to peak in the second half of the 2021 financial year (2H21).  

The analyst added that the extensions would “drive higher probability of default”, and “higher expected loss” in the internal models of Australia’s banks, “even where default is avoided”.  

Constraints on borrowing capacity and growing credit quality concerns have eroded demand for new housing finance over the past few months. 

According to the Australian Bureau of Statistics’ (ABS) latest Lending Indicators data, the value of home loan approvals plunged 11.6 per cent (seasonally adjusted terms) to $16.4 billion in May – the largest fall in the history of the series.

This followed a 4.8 per cent decline in April, which was the sharpest fall since May 2015.

[Related: Deferral extensions ‘significantly raise’ credit quality risks]