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Major bank introduces new serviceability probe

by Charbel Kadib7 minute read
The Adviser

Brokers will now be required to document their clients’ post-retirement mortgage repayment plans, with a big four bank updating its credit policy as part of its commitment to “lending responsibly”.

NAB has announced changes to its home loan serviceability policy for borrowers approaching retirement age.

From Saturday, 25 July, brokers will be required to enquire about and document their clients’ mortgage repayment strategy post-retirement.

After identifying their clients’ planned retirement age, brokers will be required to assess the borrower’s repayment strategy based on specific metrics set out by NAB, which determine the level of “enquiry, supporting documents and verification required to satisfy the policy”.

For example, if a borrower is over 55 or plans to retire in the next 10 years, the application will need to include:

  • at least one co-applicant under the age of 55 or within 10 years of their intended retirement with “sufficient income to service the home loan at drawdown”.
  • evidence of financial assets worth at least 100 per cent of the loan limit; or
  • evidence of a plan to downsize an owner-occupied home (with at least $200,000 in available equity at drawdown) once the applicant retires.

According to NAB, the new policy is part of its commitment to “lending responsibly” and ensuring that prospective borrowers “understand the potential impact of home loan repayments”, particularly upon retirement.

NAB’s changes are the latest of several revisions to credit policies in recent months, with lenders reducing their risk appetites in response to growing credit quality concerns off the back of COVID-19.

S&P Global Ratings is forecasting an 85 bps increase in credit losses across the Australian banking sector’s loan portfolio in the 2020 financial year (FY20).

The 85 bps increase, which is expected to moderate to 50 bps in 2021, amounts to approximately $29 billion in gross loans, nearly six times higher than the record low in FY19.

Constraints on borrowing capacity and growing credit quality concerns have eroded demand for new housing finance over the past few months. 

According to the Australian Bureau of Statistics’ latest Lending Indicators data, the value of home loan approvals plunged 11.6 per cent (seasonally adjusted terms) to $16.4 billion in May – the largest fall in the history of the series.

This followed a 4.8 per cent decline in April, which was the sharpest fall since May 2015.

AMP Capital chief economist Shane Oliver has warned that recent adjustments to serviceability requirements could have unintended consequences.

Mr Oliver explained that tighter lending standards could further weigh on demand for housing, already subdued off the back of income loss and immigration restrictions.  

“If you go back to the time of the GFC in the United States, there were very [loose] lending standards up until 2006-2007, and then the tightening in lending standards that occurred once prices started to fall exacerbated the downswing,” he told The Adviser’s sister brand, Mortgage Business.

“It has the very effect they’re trying to avoid.

“That could well happen here, that tightening by the banks exacerbates the downswing and then ultimately causes more weaknesses in the economy, which then [leads] to more forced selling of houses and puts more downward pressure on prices.”

He concluded: “If the banks tighten their lending standards, you end up with a double whammy in terms of reduced demand.”

COVID-induced weakness in demand for housing has already triggered falls in national home values.  

According to the latest data from property research group CoreLogic, national home values have fallen 0.8 per cent over the past quarter, led by cumulative declines of 3.1 per cent in Sydney and Melbourne.

[Related: Lender ramps up home lending scrutiny]

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Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

Email Charbel on: Charbel.Kadib@momentummedia.com.au

Comments (14)

  • LOL...
    Common sense is all but gone from residential lending with Banks having to cover their backsides and borrowers no longer able to make an informed financial decision for themselves.
    Forms, forms and more forms trying to predict the future, bit like treasury trying to predict how many will take up JobKeeper.

    Pro Broker
    1
  • C'mon brokers this is from the bank who stand behind brokers....anyone know what they are doing back there!?
    0
  • Whats the fuss....
    1. ensuring affordability throughout the loan term is normal practice (where loan term exceeds retirement age)
    2. The asset position of a client has always been important in the post retirement phase of a loan cycle
    3. the development of an exit strategy is malleable and can involve numerous measures to demonstrate affordability
    4. downsizing is not a stand-alone exit strategy (as outlined in the Royal Commission) and is a technical breach of NCCP, 5. hold your breath...its probably not unreasonable for NAB to want $200,000 equity in the property at retirement
    If you don't like the policy...don't use NAB...they have got plenty of loans on the books due to the $4k refi bouns, so the tightening of the policy reflects their current appetite . Many other lenders do the same (low rates, cash incentives etc and then shut the gates when the target is met).
    1
  • Not sure what the big deal is. Lenders have been asking for exit strategies for older clients for years now. If brokers aren't building this into your applications, they're not doing the job properly.
    0
  • What does this mean "evidence of a plan to downsize an owner-occupied home (with at least $200,000 in available equity at drawdown) once the applicant retires"?
    What if you dont want to downsize? Will you not service the loan if you intend to live in your big family home after retirement?!?
    0
  • That should solve the problem that didn't exist!
    Even if someone has a nominal mortgage at retirement and if the repayment is still cheaper than renting, why is this a problem??
    Let's not create any more paperwork especially when all it does is lock people into higher loans (rates and fees) than required
    1
  • Dont use NAB and never will .
    0
  • Sounds like financial advice to me and would require specific licensing. If a broker makes calculations and assumptions on which lenders rely, and the borrower is encumbered with a loan - who will be blamed if an issue arises? Too much is just being thrown back onto brokers. Therefore, a plan or statement from the client or their FP might be required. Are lenders just divesting themselves of all possible recourse?
    1
  • Responsible Lending. Obviously something behind this as the banks branches have neever heard of it, or lend like they have never heard of it
    0
  • Bit like an exit strategy
    0
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