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Released this week, The Property Imperative Report V report from Digital Finance Analytics (DFA), applied the typical underwriting criteria being used today to the 26,000 households surveyed in the DFA Household Finance Confidence index.
The modelling assumed that, as a result of regulatory changes, all mortgages written today will be assessed on a serviceability hurdle rate of 7.5 per cent, interest-only loans require a repayments path, and real spending must be used rather than a standard ratio.
“Given the tighter criteria in play now, we were not surprised to discover that some loans would now not be approved without an override – meaning they were outside current norms,” DFA principal Martin North said.
“Overall about four per cent of loans in the national portfolio would now fail underwriting standards and two-thirds were for investment purposes,” Mr North said.
The report found that the majority of loans fell in the $500,000 to 750,000 range, predominately in NSW (six per cent) and Victoria. The loans were most likely to have been written in 2014 or 2015.
“Nine per cent of loans written so far this year would now fail current underwriting standards,” Mr North said.
“We expect underwriting criteria to continue to tighten, so more loans will fall outside current underwriting standards, representing some potential downstream portfolio risks.”
The report also found that there is almost no difference now between an interest-only loan and a principal- and-interest repayment loan.
“This is a significant change, highlighting the fact that the previous affordability benefit for an interest-only proposition has dissipated,” Mr North said.
The DFA report examined banks, non-banks and the mutual sector.