Advisers say buyers are frustrated as they see the market turning but are unable to purchase until interest rates fall.

Stress test rates are seen as preventing many deals from going ahead and banks’ assessment of expenses are still seen as rigorous overall, the survey shows.

It’s a fair assessment, says former Infometrics regional head and now independent economist, Benje Patterson.

“Banks’ mortgage stress tests are a joke. They don’t have reasonable stress tests – they are stress tests proximate to the current interest rate rather than tests that could reasonably be assumed to eventuate at times across the lifecycle of a mortgage.”

He says banks were only stress testing borrowers in the 5% to 6% range a couple of years ago.

“These sorts of stress rates were above the 2% rates that were prevailing at the time, but still well below the 9% to 11% mortgage rates of not that many moons ago in 2008. In my opinion, banks’ narrow focus on short-term profitability has set some households up to fail.

“No one should have been borrowing if a lift in mortgage rates to a level seen in recent history was going to push them into arrears.”

He says it would be helpful for banks to demonstrate to borrowers what things would look like if interest rates were at that 2008 level.

Borrowers naive

“A lot of borrowers are unfortunately quite financially naive and put a lot of trust into the bank. And what they don't realise is that stress testing is purely a tool for the bank to manage their risks around bad debtors. It's not actually a tool to accurately reflect what stress a borrower might come under.”

Patterson says mortgage advisers could give borrowers a more detailed and accurate reflection of their personal circumstances and a prudent level of debt to take on, rather than the maximum level the bank is willing to extend.

Increasing levels of debt are becoming a problem. The latest figures from credit agency Centrix show 19,500 households were behind with mortgage repayments in June, up 34% year-on-year. This is the highest level since the start of the pandemic in March 2020.

Patterson says banks and mortgage advisers should preemptively talk to clients about what getting behind with repayments could potentially mean.

“It’s not just about the repayments, but also the types of adjustments they could make in their life to maintain a similar living standard given that they're going to have much more of the budget going into their mortgage repayments.”

For most people, Patterson says, it is about their own financial circumstances and the state of the economy. “It's all proximate to where we are here and now, and it's those sudden changes that cause the most distress rather than gradual changes that people can plan for and adjust to.”

He says for the first time in 10 to 15 years, there has been a sharp escalation in borrowing costs within a short space of time. We've got a new generation of homeowners who are not used to this escalation in the way generations before had encountered.”

Patterson stress tested his household at scenarios many percent above where mortgages are currently and tailored the borrowing to suit.

“At the time, our lending adviser probably thought I was a condescending kook. Well, I will happily wear that kook badge and only wish the Reserve Bank made more of a song and dance about realistic long-term stress testing of households. Such a move would be less about systemic financial stability and more about the financial wellbeing of individual households.”

Lending brutal

The Alexander survey includes comments by advisers on lending to first home buyers and investors including

• more lenient now with clients’ expenses which is good, discretionary expenses not needed to be included now in applications;
• fewer restrictions on expenses, however, seeing more clients with credit impairments;
• higher stress test rates are eliminating a number of potential hopeful buyers:
• slight loosening of high LVR lending with banks now entertaining ‘new’ clients if deals are live.

Advisers say the lifting of LVR restrictions last month has been positive. The 1 June change in loan-to-value ratio rules has allowed banks to undertake extra lending at less than 20% deposit, and cutting the minimum investor deposit from 40% to 35% of property valuation.

Alexander says in an environment of low sales and with the Reserve Bank perhaps still sensitive to any signs mortgage rates are being discounted, banks are relying on easier lending rules in order to at least protect market share.

Comments by advisers regarding bank lending to investors include:

• investors still sitting on the sidelines until they know what’s happening with the election and interest deductibility;
• brutal. Basically a waste of time unless clients have very strong income and low debt;
• investors have gone very quiet, not getting any enquiries in regard to buying another property.

Adviser perceptions of banks’ willingness to lend have remained firmly above average, although have dipped this month to a net 27% positive from 42% in June, after taking a big step backwards in February.