Finance Property Banks hungry for ‘right type’ of borrower: Royal commission’s home loan effect Updated:

Banks hungry for ‘right type’ of borrower: Royal commission’s home loan effect

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The banking royal commission verdict is in and it has dropped like a tonne of bricks on Australia’s mortgage brokers. 

Critics are concerned the recommendations, if adopted, could crush the industry, reduce competition and drive borrowers into the arms of the big banks.

With property prices falling in the major cities amid ongoing talk of a credit squeeze, what does Commissioner Kenneth Hayne’s report mean for would-be home buyers looking for a loan?

Home loans harder to get

Last year’s royal commission hearings exposed systemic misconduct within Australia’s major banks, with revelations of irresponsible home loan lending on a mass scale.

Big banks tightened their lending requirements in response to the revelations of their bad behaviour, making it more difficult for some borrowers to get a home loan.

Figures for the third quarter of 2018 from the Australian Prudential Regulation Authority show that risky ‘low deposit loans’ to borrowers with only a 10 per cent deposit saved fell by 13.4 per cent year on year, while low-documentation loans were down 43 per cent over the same period.

Interest-only loans to investors also fell from a record high of 45.7 per cent of all new loans written in the midst of the price boom in June 2015, to just 16.2 per cent of new loans towards the end of last year.

However, the general consensus following the release of Monday’s final report is that home loans won’t become more difficult to secure.

“[The final report] on its own implies no further tightening in bank lending standards … Basically it just reinforces the tightening that’s already occurring,” AMP economist Shane Oliver said.

The report could even help bolster flagging home prices, Moody’s Investors Service’s Frank Mirenzi said.

“The final report has not proposed any changes to responsible lending laws, which might have reduced access to credit, removing an additional source of negative pressure for the housing market, where house prices in Australia’s two most populous cities, Sydney and Melbourne, have been declining over the past 12 months,” he said.

Banks ‘even hungrier’ for ‘the right type’ of customer

Speculation over a Reserve Bank interest rate cut has also grown, with RBA governor Philip Lowe citing falling home prices and tighter credit conditions for “some borrowers” in Tuesday’s rationale for keeping the official cash rate on hold at a record low of 1.5 per cent for the 30th month.

“Credit conditions for some borrowers are tighter than they have been. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed,” Mr Lowe said.

He also noted that mortgage rates “remain low” and there is “strong competition for borrowers of high credit quality”.

While the royal commission has forced banks to shy away from approving riskier home loans, they have become hungrier for “the right type of customers”, RateCity research director Sally Tindall said.

If the average home owner on a discounted variable rate with a big bank sought to refinance and switched to the lowest variable rate on the market, they could save up to $77,340 over the life of their loan, research by the mortgage comparison site found.

“The serviceability clampdown will have scared some people out of refinancing, when in fact it’s made banks even hungrier for the right type of business,” Ms Tindall said.

“If you live in your own home and own at least 20 per cent of it, it could be time to go mortgage shopping. In a market of supposedly rising interest rates, there are still plenty of low-rate home loans on offer, but only if you’re prepared to walk.

“A lot of people out there probably don’t realise they are what the banks call an ‘ideal’ borrower. If this is you, then you hold the cards in any home loan negotiations.”