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Tough times ... rising property prices in Sydney and Melbourne have continued to push out entry-level buyers. Source: Supplied
HOME loan borrowers are being given loans too easily and instead their repayments should be assessed on higher interest rates, one of the nation’s biggest debt collection agencies claims. Prushka’s chief executive officer Roger Mendelson said it was a real problem that many banks were assessing borrowers on interest rates of just 7 per cent when signing their up to new loans, and not taking into account whether the borrowers would be able to afford to pay back their loans if and when interest rates rose.
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Taking action ... Prushka chief executive officer Roger Mendelson says home loan serviceability rates should be increased to 8 per cent. Source: News Corp Australia
“At the moment you can borrow at rates of about 4.5 per cent,’’ he said.
“Using a benchmark of seven per cent is too low, I think banks need to rein in loans in housing.
“I think anyone should factor in at least if interest rates were eight per cent and whether they would be able to cope.â€
Fears of a property bubble emerging continue as property prices climb and some lenders offer home loans deals with a “3†in front.
In the Reserve Bank of Australia’s latest Stability Review it said banks’ serviceability assessment should “include an interest rate of at least two per cent above the loan rate, with a minimum floor assessment of seven per cent†when assessing whether a customer could cope when rates are higher.
Some countries have even taken a draconian approach and introduced customer loan to income ratios caps, allowing borrowers to only sign up to mortgages that are no more than 4.5 times their income.
The UK and Ireland are among those to introduce these tough caps.
New Zealand’s central bank is also gathering information on borrowers’ loan to income ratios but it’s tipped that if they do introduce similar caps to the UK and Ireland it could shut-out entry-level buyers.
The Australian Prudential and Regulation Authority put out a stern warning to banks in December that investment lending was not to grow above 10 per cent, resulting in many financial institutions tightening their lending criteria.
The Australian Bankers’ Association’s chief executive officer Steven Munchenberg said the banks had strict serviceability criteria that they used to determine whether a borrower could service a loan and this included factoring in their wages.
The RBA meets again on Tuesday and it’s expected they will keep the cash rate on hold at 2 per cent.
Repayments ... Steven Munchenberg says the banks use strict criteria to determine whether customers can service loans. Source: News Corp Australia
Mortgage Choice examined Australian Bureau of Statistics data and found the average loan size in Australia ($342,500) was 4.5 times the average yearly wage ($75,600.)
Residential property prices across the nation’s eight capital cities were up by 6.9 per cent for the year to March.
In Sydney they rose by 13.1 per cent in the same period and in Melbourne they climbed by 4.7 per cent.