Commonwealth Bank moves first on home loan tightening

Commonwealth Bank’s move comes just a day after regulators warned lenders about the growth of the runaway housing market.

Regulators have issued a warning amid signs of “increased risk taking” in the booming housing market. Picture: Thinkstock

The Commonwealth Bank has become the first of the big four banks to tighten home loan standards, just a day after regulators warned the sector over rising credit growth that has turbocharged housing markets.

The bank said it was changing the home loan assessment floor rate used to assess home and investment home loan applications from 5.10 per cent per annum to 5.25 per cent per annum.

The serviceability floor rate is used by banks to judge whether borrowers can meet monthly mortgage repayments.

“In delivering this change, we have taken into consideration the ongoing affordability for our customers during the life of their loan, as well as any potential changes the customer may incur,” CBA said.

Australia’s biggest bank said that from Saturday, as part of its regular monitoring and review of policies and services, it had reviewed its serviceability floor rates “to ensure we continue to lend responsibly in the current low interest rate environment”.

The lender said while it was changing the home loan assessment floor rate, the interest rate buffer used on loans would remain unchanged at 2.50 per cent per annum.

The bank insisted that the majority of customers applying for a home loan would not be impacted by the change.

Lenders are required by the Australian Prudential Regulation Authority to ensure that borrowers can repay loans at the higher of 2.5 per cent more than current interest rates, or the floor rate set by the bank.

The Commonwealth Bank says the majority of people applying for home loans will not be affected by the change. Picture: James Gourley

The move will means the CBA will have the highest floor rate of the big four banks, with its serviceability floor rate above Westpac (5.05 per cent), NAB (4.95 per cent) and the ANZ (5.1 per cent).

Although the switch could impact on borrowing by future home loan applicants, the bank says that 90 per cent of customers aren’t borrowing at capacity.

RateCity.com.au research director, Sally Tindall, said the bank’s lift would help protect people from overstretching themselves. “This is a prudent and responsible move that will help ensure customers can afford their repayments when rate hikes kick in,” she said.

Ms Tindall said the move “comes on the back of a warning from APRA to the big banks to proactively manage risky lending fuelled by skyrocketing property prices” and expects other lenders to tighten.

“We expect other banks will revise their floor rates upwards in coming months,” she said.

The latest APRA statistics show Australians are increasingly taking on risky levels of debt. The value of new home loans with a debt-to-income ratio of six and over rose to $23.77bn in March. This is an increase from 16.3 per cent to 19.1 per cent as a proportion of new lending year-on-year.

The nation’s financial watchdogs were this week revealed to be on alert amid signs of “increased risk taking” in housing market and also exploring options to curb home lending, as the prudential regulator sought out assurances from the major banks that lending standards had not dipped.

The Council of Financial Regulators at its quarterly meeting earlier this month discussed what might be the “appropriate options to employ” should house prices accelerate and outstrip growth in incomes, saying such an outcome was “not in the country‘s interests”, particularly in an environment of high debt, Reserve Bank of Australia boss Phil Lowe said last Thursday.

Regulators were “not at the point” where they were “actively considering implementing any initiative, but we are doing the preparation of what we might do” should credit growth take off, Dr Lowe said.

He said regulators were “looking at debt-to-income ratios, loan-to-value ratios and the type of restrictions we saw a few years ago”, which included limits on lending to investors and the pace of interest-only mortgages.