Tony Alexander’s latest survey of mortgage advisers shows the easing in lending criteria may reflect banks pulling back from trying to attract business through discounted interest rates. Several advisers mentioned banks taking margin and not discounting.

Further feedback from advisers shows credit conditions cannot be considered to be easy – just slightly less tight. As the retail interest rates charged by banks have risen, so too have the test rates they use to check buyers can afford the loans.

Many borrowers cannot meet debt servicing requirements with test interest rates between 8.75% and 9.5% and assessment of expenses and spare income requirements remaining relatively tight – though easing bit by bit each month.

There is no other purchase where people are only given the go-ahead to buy, if they can afford to pay more than the asking price.

The big bank test rates were between 300 and 400 basis points more than industry average one and two-year fixed rate loans throughout 2018, 2019 and 2020, Reserve Bank data shows. But now, with many banks the gap is down to less than 200 basis points.

Advisers say changes to CCCFA have been wiped out by the higher test rates, which impact loan approval amounts. The test rates, many advisers believe, could be having an impact on prices at the lower end of the market as vendors and agents realise buyers cannot borrow as much.

Big market share for first home buyers

First home buyers remain the main driving force behind improving activity levels. A net 55% of respondents say they are seeing more first home buyers in the market. This is the third strongest for the past three years and continues a string of responses since February showing young buyers have become a dominant force in the residential real estate market.

CoreLogic data shows first home buyers had 25% market share of all property purchases, on par with previous record highs and well above the long-term average of 21-22%.

Comments on bank lending to first home buyers by advisers include the following:

• assessors are being more reasonable with expenses;
• most banks now have a stress test rate now at 9% or over;
• strong employment history is still top priority and minimal short term debt;
• banks are strict on first home buyers unless they meet the First Home Loan criteria, making it hard to get those across the line due to high servicing and low equity margins; and
• higher test rates have meant loan amounts are somewhat subdued.

Meanwhile, there is still no sustained indication that investors are returning to the market to follow the first home buyers, Alexander’s survey shows. 

A net 13% of advisers say they are seeing fewer investors looking for financing advice. This is unchanged from July’s result.

Comments made by advisers regarding bank lending to investors include the following:

• some minor loosening of policy from (a bank) this week. Very marginal but not shading rental income by as much as previous;
• affordability is still a struggle for investors. The banks are willing to lend and the increase to 65% is good, if they could afford to;
• not a lot of investor funding - 65% LVR has created some enquiry, but the cash to service is not there.

Buyers, who can get finance, are favouring a two year fixed term. Advisers say few people are interested in three years or longer.