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In a speech at the Macquarie University Financial Risk Day in Sydney on Friday, APRA general manager Heidi Richards said the regulator conducted two exercises using hypothetical borrowers to test the lending criteria of banks.
“APRA conducted the first exercise as of end-2014 with 17 ADIs, and recently repeated the exercise as of end-September 2015 with the same group, expecting to see changes in lending policies,” Ms Richards said.
“The results of the first exercise showed that it was not uncommon to find the most generous ADI was prepared to lend 50 per cent more than the most conservative,” she added.
“We found this disparity was particularly the case for our hypothetical investor borrowers.”
However, even for owner-occupiers, APRA found that banks were willing to lend at levels ranging from 5x to 6.5x gross income.
“This was surprising since, with mortgage comparison sites and online calculators now readily available and mortgage insurers providing some oversight, one might expect to see reasonable consistency in how loan applicants are assessed,” Ms Richards said.
On the income side, the largest difference APRA saw across banks was the discounting or ‘haircut’ applied to non-PAYG income, including rental income on investment properties.
Ms Richards noted that wage and salary income is typically given full value, but other less certain sources are generally subject to 'haircuts'.
“At the time of the first exercise in late 2014, some ADIs were applying no haircut, ie, accepting these income sources at face value, whereas others were applying discounts of 20 per cent or more to reflect uncertainty and other costs,” she said.
“In the case of rental income, bearing in mind the cost of real estate fees, strata fees, rates and maintenance, not to mention periods of vacancy, the 20 per cent norm that we observed did not seem particularly conservative.”
All ADIs are now applying at least minimum haircuts on uncertain income sources, and some have gone further to apply larger discounts to rental or other income, Ms Richards said.
Interestingly, she noted that some banks also include anticipated future tax benefits from negative gearing on a rental property in the calculation of allowable income.
“We did see a few ADIs applying more aggressive interpretations in this regard, where negative gearing tax benefits increased the possible loan size for one of our hypothetical investor borrowers by up to 10 per cent,” she said.
“More prudent practice is not to rely on negative gearing to get a borrower over the line.”
[Related: Lending curbs are nothing new, says APRA]