Loan shopping
The variation in mortgage borrowing potential can be up to $160,000, writes Rob Stock.
Banks’ risk appetites can mean big differences in what homeowners borrow, a mortgage broker says.
Bank mortgage ‘‘stress-testing’’ is resulting in dramatic differences in how much they will lend to home buyers.
Banks, and other mortgage lenders, ‘‘stress test’’ mortgage applications by working out if borrowers could cope with rising interest rates, Mike Pero Mortgages chief executive Mark Collins said.
They do this by calculating repayments as though an applicant’s entire mortgage was a floating rate loan at between 1.3 per cent and 2 per cent higher than the current advertised rate.
A look across Mike Pero Mortgages’ panel of lenders, including big banks, showed differences in stress test thresholds could affect an applicant’s borrowing power by as much as $160,000.
The stress tests don’t only differ on the test rates used, but also on the level of disposable, uncommitted income lenders need to see in borrowers’ budgets.
Stress-testing was the right thing for banks to do, Collins said, as it was part and parcel of responsible lending.
But the public was largely unaware of how different the maximum lending levels at different banks and non-bank lenders could be on any given day, for any given customer.
‘‘Each bank has a different appetite for risk, so what we’re seeing is lenders stress testing anywhere from 7 per cent right up to 8.5 per cent,’’ he said.
‘‘This means there are big variations in how much both bank and non-bank lenders are willing to lend Kiwi home buyers.’’
The mortgage broker did a survey of three big banks, and three non-bank lenders, using the example of a couple with a combined income of $130,000, a clean credit history, savings of
$100,000, and ongoing monthly expenses of $2032, who were seeking a loan to be repaid over
30 years.
It found the three banks would lend $813,000, $755,000 and $648,000 respectively.
The non-banks would lend
$785,000, $754,000 and $670,000. Collins said: ‘‘Lenders tend to align stress testing thresholds with movements in the official cash rate. However, they do have the ability to adjust their stress testing levels outside of OCR movements.
‘‘In the last few years, even with the cash rate at record lows, the banks have ‘self-regulated’ by increasing stress testing levels.’’
There was an increased willingness among banks to lend to home-buyers, Collins said.
‘‘Now the heat is out of the market, and the LVR [loan to value ratio] restrictions are slowly being relaxed, the banks are open for business again, and we might see a relaxing of what’s been a conservative approach to testing loan serviceability.’’
The stress-testing differences meant there was a significant variance in how much each lender would lend a would-be buyer, so people seeking mortgages should shop around.
‘‘Borrowers should understand that every lender is different,’’ Collins said. ‘‘In a competitive property market, an extra $160,000 can make a big difference.’’