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(Australian Associated Press)
Homebuyers will not be able to borrow as much money once banks move to fully verify their expenses, with some analysts tipping it will reduce maximum borrowing capacity by about 30 per cent.
Analysts expect the availability of credit will tighten even further after banking royal commissioner Kenneth Hayne QC called out the banks for failing to fully assess a borrower’s financial situation.
Verification calls for more than taking the consumer at his or her word, Mr Hayne said in his interim report, dismissing bank arguments that verifying a consumer’s outgoings is too hard.
UBS banking analysts said Mr Hayne’s statements show banks’ attempts to validate borrower expenses by increasing the number of expense categories they collect during a loan application still does not constitute verification.
“We estimate that a move to full expense verification is likely to reduce maximum borrowing capacity by approximately 30 per cent,” they said in a research note.
UBS estimated current improvements and tightening of underwriting standards by the banks have already reduced maximum borrowing capacity for owner-occupiers by 7-10 per cent and by about 20 per cent for investors.
“Therefore there is likely to be a further substantial tightening in maximum borrowing capacity to come.”
They said the interim report suggested further tightening of underwriting standards was required for banks to fully comply with responsible lending laws.
“We believe that the current credit squeeze is likely to worsen as the banks move to comply with a more rigorous definition of responsible lending.”
Banks will have to do more to verify customers’ income and actual living expenses rather than rely on the widely-used benchmark household expenditure measure.
Property data firm CoreLogic head of research Tim Lawless said a more conservative lending approach going forward is likely to impact further on the availability of credit.
“If credit conditions do tighten further from here, we can expect housing market activity to follow suit,” he said.
The interim report blamed greed and the pursuit of profit for the widespread misconduct in the financial services sector.
While Mr Hayne has not made any recommendations yet, Morgan Stanley analysts believe wide-ranging reform is likely.
They said the probability of changes to legislation may be lower than they had thought given comments in the interim report, but the probability of structural change for the banking industry now seemed higher.
“We continue to believe that a reduction in profitability may be required over the next few years in order to win back the support of key stakeholders and enhance long-term sustainability,” their report on Australian banks said.
The UBS analysts said any hopes the royal commission’s final recommendations may be watered down or not adopted by current or future governments “appears highly optimistic”, given comments from the treasurer and calls by Labor to extend the inquiry.
Global ratings agency S&P noted the banks have started to implement changes to conduct, culture and governance ahead of the royal commission’s final recommendations.
The inquiry received 10,140 submissions from the public about their past experiences, 61 per cent of which focused on the banking industry.