CBA tightens mortgages amid new deposit rules
Richard Gluyas February 23, 2009 The Australian
THE Commonwealth Bank will tighten borrowing rules for first-home buyers to insist they contribute at least 3 per cent of the purchase price in their own money, in addition to any available government grants.
The move is in response to growing industry concerns about the quality of loans to the fast-growing, first-home buyer market and is in anticipation of interest-rate hikes in coming years, due to the expected inflationary impact of the large, recent increase in household income.
Currently, government grants of up to $14,000 for an existing home and $21,000 for a new home mean some first-home buyers can purchase dwellings with a 5-10 per cent deposit and no cash contribution of their own.
"Customers who have skin in the game in terms of their own funds are more committed to continue their repayments," CBA group executive retail banking services, Ross McEwan, told The Australian.
"So in the next couple of weeks, we're implementing a policy to require borrowers to contribute a minimum of 3 per cent (of the purchase price) on top of any government grant."
The move by Australia's biggest home lender follows recent cuts to the amount that ANZ and National Australia Bank will lend to borrowers as a proportion of property value.
NAB last month cut its maximum loan-to-valuation ratio from 100 to 95 per cent, while ANZ in November reduced the proportion it would lend to mortgagees from 95 to 90 per cent.
"In response to the softening in the economic environment, we have been tightening lending standards in recent months because as a responsible lender, we do not want customers in a situation where they are over-extended," an ANZ spokesman said.
But the CBA is already looking beyond the downturn.
As standard variable rates plunge to their lowest level in almost four decades, following a 400 basis-point easing in monetary policy since last September, the CBA is preparing for an inevitable turn in the cycle.
Mr McEwan said the bank's mortgage serviceability buffer had been tightened to ensure that customers could still meet their repayment obligations if interest rates rose by 2.25 percentage points. This was higher than the previous buffer of 1.5 percentage points.
"Home owners in Australia have a very good track record of keeping up their repayments under various scenarios," Mr McEwan said.
"What we want to avoid is a US-type situation, where people with low-interest loans got caught out when interest rates started to rise."
The move will be interpreted by some as credit rationing, in an environment where the cost and availability of wholesale funding remain under pressure.
But Mr McEwan said this was not the case, pointing to the bank's proven ability to raise funds, as well as its appetite for residential lending that was demonstrated by a rising market share over the past 21 months.
Home lending, he said, had remained strong over Christmas and last month, with market share picking up by 26 basis points in December.
The CBA chief said the real motivation for the measure was prudent credit policy in an environment where interest rates would eventually rise.
"The buffer needs to be extended for a situation when inflation starts to pick up and interest rates rise," he said.
Meanwhile, the CBA will roll back its fees for customers using other banks' ATMs, dubbed "foreign ATMs".
I have been concerned about banks willingness to lend such large amounts over the last decade, so this news is long overdue from my perspective. Managing debt is a responsibility and I think it good that banks play a bigger role ensuring they lend to people able to cover that responsibility in the medium term as rates rise. The question people rarely ask is 'can I handle this debt for many years to come, and if times get tougher?' instead many have been permitted to borrow on the condition they have the ability to handle the debt in the immediate term whilst conditions remain constant - but nothing is constant! Do any of you disagree with me? Should banks be free to lend more, take bigger risks, giving people more freedom to chose?
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2 comments:
I agree with you, irresponsible lending should be stopped. Previously there were strict guidelines that in the industry which were ignored for the sake of greater interest revenue. We all saw the effects of this on a large scale with the American subprime mortgage crisis leading to a global recession. Banks should be more selective with loans but people should also have more common sense, particularly now in our current economic climate. But where is the line drawn- How strict should lending regulations be? and how will these regulations change according to differing interest rates? I also found a resource which I think is quite fun to read its a blog dealing with economics and financial issues from every angle and level
http://www.nakedcapitalism.com/
With CBA tightening their rules, people might begin to be aware of the effects on people and the amount of their loans, i agree completely with what the current banks are deciding to do, people should understand more that we cant go about buying whatever we want, unfortunately we live in a time where this idea is very prevelant in society, banks should not be taking risks for people who really have no security for the sake of the world economy, with a lot of banks going under in the US affects the economy on a world scale. 3 percent of the purchase price really isn't that much of overall price (excluding government grants) and if it is too much downsize! Where did logic go? Will we be discussing these sorts of questions more in class or will it be mainly touching on it and more discussion on Blog.
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