Item<\/h3>\n<\/td>\n\nDescription<\/h3>\n<\/td>\n\nExample<\/h3>\n<\/td>\n<\/tr>\n\nEmployment income <\/strong><\/td>\nThe bank will verify your income from the YTD income on your payslip. They won\u2019t always include 100% of bonuses, commission or any \u2018at risk\u2019 income.<\/td>\n Rick and Karen are both employed. Rick\u2019s salary is $250k and Karen works part-time earning $80k. Their monthly after-tax income is $18,347.<\/strong><\/td>\n<\/tr>\n\nRental income<\/strong><\/td>\nMost lenders will include 70-80% of gross rental income to allow for expenses.<\/td>\n Rick owns an investment property and the tenant pays $505 per week. The lender includes $1,531<\/strong> of monthly income.<\/td>\n<\/tr>\n\nLiving expenses<\/strong><\/td>\nThis is where the fun begins\u2026 The lender will review the last 3 months of your bank statements to ascertain what you spend.<\/td>\n Rick and Karen have stated that they spend $8,000<\/strong> per month.<\/td>\n<\/tr>\n\nCredit cards<\/strong><\/td>\nMost banks will multiply your credit card limits by 3.8% to work out the minimum repayment if your card was fully drawn.<\/td>\n Rick and Karen have $15,000 of credit card limits so a monthly expense of $570<\/strong> is added.<\/td>\n<\/tr>\n\nMortgages<\/strong><\/td>\nRepayments are worked out using a benchmark interest rate on a P&I basis.<\/td>\n Rick and Karen have two loans. A home loan for $850k and an investment loan for $750k.<\/p>\nMonthly repayments over 25 years at 7.25% are $10,914<\/strong>.<\/td>\n<\/tr>\n\nResult<\/strong><\/td>\nTotal income must be greater than total expenses.<\/td>\n Total income is $19,878. Total expenses are $19,484. Surplus is $394. Rick and Karen wouldn\u2019t qualify for any additional borrowings.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nThe table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.<\/p>\n
The impact of the recent benchmark interest rate reduction<\/h3>\n
Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4\u2019s borrowing capacity using the same inputs and the table below summarises my findings.<\/p>\n
\n\n\n\u00a0<\/strong><\/td>\nWestpac<\/strong><\/td>\nANZ<\/strong><\/td>\nCBA<\/strong><\/td>\nnab<\/strong><\/td>\n<\/tr>\n\nOld<\/td>\n $815k<\/td>\n $750k<\/td>\n $800k<\/td>\n $770k<\/td>\n<\/tr>\n \nNew<\/td>\n $880k<\/td>\n $900k<\/td>\n No change yet<\/td>\n No change yet<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nANZ\u2019s borrowing capacity has increase by 20% whereas Westpac\u2019s only increases by 8% because it made some changes to minimum living expenses \u2013 they give with one hand and take with the other. It is interesting to note that ANZ and nab\u2019s borrowing capacity vary by almost 17%! This demonstrates that it\u2019s important to compare a number of lenders.<\/p>\n
Please don\u2019t conclude from the above analysis that ANZ\u2019s borrowing capacity will always be higher than nab\u2019s. There are so many idiosyncrasies with each bank\u2019s policies and as well as differences in individual client circumstances that can change which lender offers the highest borrowing capacity.<\/p>\n
Living expenses are the real problem<\/h3>\n
The more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.<\/p>\n
The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.<\/p>\n
But of course, that is nonsensical. If you experienced cash flow pressure, of course you would eat out less often (or maybe not at all). Therefore, maybe the banks should only include a portion of a borrower\u2019s discretionary expenses e.g. say 50% – to make allowance for the fact that you do have the discretion to reduce them in order to meet your financial commitments. Eating out is not a financial commitment!<\/p>\n
Will this loosening in credit policy stimulate property price growth?<\/h3>\n
The diagram below (click to enlarge) charts the monthly volume of total new housing finance commitments (excluding refinances) from 2002, when the data set began, and 2019. I have adjusted the amounts for the impact of inflation. I have compared that to the annualised change in median house values over a rolling 3-year period (for Melbourne, Sydney, Brisbane and Perth).<\/p>\n
It is important to observe that credit flows have been relatively volatile \u2013 ranging from $15 billion and $25 billion per month over the period.<\/p>\n
Description<\/h3>\n<\/td>\n\nExample<\/h3>\n<\/td>\n<\/tr>\n\nEmployment income <\/strong><\/td>\nThe bank will verify your income from the YTD income on your payslip. They won\u2019t always include 100% of bonuses, commission or any \u2018at risk\u2019 income.<\/td>\n Rick and Karen are both employed. Rick\u2019s salary is $250k and Karen works part-time earning $80k. Their monthly after-tax income is $18,347.<\/strong><\/td>\n<\/tr>\n\nRental income<\/strong><\/td>\nMost lenders will include 70-80% of gross rental income to allow for expenses.<\/td>\n Rick owns an investment property and the tenant pays $505 per week. The lender includes $1,531<\/strong> of monthly income.<\/td>\n<\/tr>\n\nLiving expenses<\/strong><\/td>\nThis is where the fun begins\u2026 The lender will review the last 3 months of your bank statements to ascertain what you spend.<\/td>\n Rick and Karen have stated that they spend $8,000<\/strong> per month.<\/td>\n<\/tr>\n\nCredit cards<\/strong><\/td>\nMost banks will multiply your credit card limits by 3.8% to work out the minimum repayment if your card was fully drawn.<\/td>\n Rick and Karen have $15,000 of credit card limits so a monthly expense of $570<\/strong> is added.<\/td>\n<\/tr>\n\nMortgages<\/strong><\/td>\nRepayments are worked out using a benchmark interest rate on a P&I basis.<\/td>\n Rick and Karen have two loans. A home loan for $850k and an investment loan for $750k.<\/p>\nMonthly repayments over 25 years at 7.25% are $10,914<\/strong>.<\/td>\n<\/tr>\n\nResult<\/strong><\/td>\nTotal income must be greater than total expenses.<\/td>\n Total income is $19,878. Total expenses are $19,484. Surplus is $394. Rick and Karen wouldn\u2019t qualify for any additional borrowings.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nThe table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.<\/p>\n
The impact of the recent benchmark interest rate reduction<\/h3>\n
Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4\u2019s borrowing capacity using the same inputs and the table below summarises my findings.<\/p>\n
\n\n\n\u00a0<\/strong><\/td>\nWestpac<\/strong><\/td>\nANZ<\/strong><\/td>\nCBA<\/strong><\/td>\nnab<\/strong><\/td>\n<\/tr>\n\nOld<\/td>\n $815k<\/td>\n $750k<\/td>\n $800k<\/td>\n $770k<\/td>\n<\/tr>\n \nNew<\/td>\n $880k<\/td>\n $900k<\/td>\n No change yet<\/td>\n No change yet<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nANZ\u2019s borrowing capacity has increase by 20% whereas Westpac\u2019s only increases by 8% because it made some changes to minimum living expenses \u2013 they give with one hand and take with the other. It is interesting to note that ANZ and nab\u2019s borrowing capacity vary by almost 17%! This demonstrates that it\u2019s important to compare a number of lenders.<\/p>\n
Please don\u2019t conclude from the above analysis that ANZ\u2019s borrowing capacity will always be higher than nab\u2019s. There are so many idiosyncrasies with each bank\u2019s policies and as well as differences in individual client circumstances that can change which lender offers the highest borrowing capacity.<\/p>\n
Living expenses are the real problem<\/h3>\n
The more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.<\/p>\n
The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.<\/p>\n
But of course, that is nonsensical. If you experienced cash flow pressure, of course you would eat out less often (or maybe not at all). Therefore, maybe the banks should only include a portion of a borrower\u2019s discretionary expenses e.g. say 50% – to make allowance for the fact that you do have the discretion to reduce them in order to meet your financial commitments. Eating out is not a financial commitment!<\/p>\n
Will this loosening in credit policy stimulate property price growth?<\/h3>\n
The diagram below (click to enlarge) charts the monthly volume of total new housing finance commitments (excluding refinances) from 2002, when the data set began, and 2019. I have adjusted the amounts for the impact of inflation. I have compared that to the annualised change in median house values over a rolling 3-year period (for Melbourne, Sydney, Brisbane and Perth).<\/p>\n
It is important to observe that credit flows have been relatively volatile \u2013 ranging from $15 billion and $25 billion per month over the period.<\/p>\n
Example<\/h3>\n<\/td>\n<\/tr>\n\nEmployment income <\/strong><\/td>\nThe bank will verify your income from the YTD income on your payslip. They won\u2019t always include 100% of bonuses, commission or any \u2018at risk\u2019 income.<\/td>\n Rick and Karen are both employed. Rick\u2019s salary is $250k and Karen works part-time earning $80k. Their monthly after-tax income is $18,347.<\/strong><\/td>\n<\/tr>\n\nRental income<\/strong><\/td>\nMost lenders will include 70-80% of gross rental income to allow for expenses.<\/td>\n Rick owns an investment property and the tenant pays $505 per week. The lender includes $1,531<\/strong> of monthly income.<\/td>\n<\/tr>\n\nLiving expenses<\/strong><\/td>\nThis is where the fun begins\u2026 The lender will review the last 3 months of your bank statements to ascertain what you spend.<\/td>\n Rick and Karen have stated that they spend $8,000<\/strong> per month.<\/td>\n<\/tr>\n\nCredit cards<\/strong><\/td>\nMost banks will multiply your credit card limits by 3.8% to work out the minimum repayment if your card was fully drawn.<\/td>\n Rick and Karen have $15,000 of credit card limits so a monthly expense of $570<\/strong> is added.<\/td>\n<\/tr>\n\nMortgages<\/strong><\/td>\nRepayments are worked out using a benchmark interest rate on a P&I basis.<\/td>\n Rick and Karen have two loans. A home loan for $850k and an investment loan for $750k.<\/p>\nMonthly repayments over 25 years at 7.25% are $10,914<\/strong>.<\/td>\n<\/tr>\n\nResult<\/strong><\/td>\nTotal income must be greater than total expenses.<\/td>\n Total income is $19,878. Total expenses are $19,484. Surplus is $394. Rick and Karen wouldn\u2019t qualify for any additional borrowings.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nThe table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.<\/p>\n
The impact of the recent benchmark interest rate reduction<\/h3>\n
Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4\u2019s borrowing capacity using the same inputs and the table below summarises my findings.<\/p>\n
\n\n\n\u00a0<\/strong><\/td>\nWestpac<\/strong><\/td>\nANZ<\/strong><\/td>\nCBA<\/strong><\/td>\nnab<\/strong><\/td>\n<\/tr>\n\nOld<\/td>\n $815k<\/td>\n $750k<\/td>\n $800k<\/td>\n $770k<\/td>\n<\/tr>\n \nNew<\/td>\n $880k<\/td>\n $900k<\/td>\n No change yet<\/td>\n No change yet<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nANZ\u2019s borrowing capacity has increase by 20% whereas Westpac\u2019s only increases by 8% because it made some changes to minimum living expenses \u2013 they give with one hand and take with the other. It is interesting to note that ANZ and nab\u2019s borrowing capacity vary by almost 17%! This demonstrates that it\u2019s important to compare a number of lenders.<\/p>\n
Please don\u2019t conclude from the above analysis that ANZ\u2019s borrowing capacity will always be higher than nab\u2019s. There are so many idiosyncrasies with each bank\u2019s policies and as well as differences in individual client circumstances that can change which lender offers the highest borrowing capacity.<\/p>\n
Living expenses are the real problem<\/h3>\n
The more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.<\/p>\n
The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.<\/p>\n
But of course, that is nonsensical. If you experienced cash flow pressure, of course you would eat out less often (or maybe not at all). Therefore, maybe the banks should only include a portion of a borrower\u2019s discretionary expenses e.g. say 50% – to make allowance for the fact that you do have the discretion to reduce them in order to meet your financial commitments. Eating out is not a financial commitment!<\/p>\n
Will this loosening in credit policy stimulate property price growth?<\/h3>\n
The diagram below (click to enlarge) charts the monthly volume of total new housing finance commitments (excluding refinances) from 2002, when the data set began, and 2019. I have adjusted the amounts for the impact of inflation. I have compared that to the annualised change in median house values over a rolling 3-year period (for Melbourne, Sydney, Brisbane and Perth).<\/p>\n
It is important to observe that credit flows have been relatively volatile \u2013 ranging from $15 billion and $25 billion per month over the period.<\/p>\n
Monthly repayments over 25 years at 7.25% are $10,914<\/strong>.<\/td>\n<\/tr>\n The table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.<\/p>\n Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4\u2019s borrowing capacity using the same inputs and the table below summarises my findings.<\/p>\n ANZ\u2019s borrowing capacity has increase by 20% whereas Westpac\u2019s only increases by 8% because it made some changes to minimum living expenses \u2013 they give with one hand and take with the other. It is interesting to note that ANZ and nab\u2019s borrowing capacity vary by almost 17%! This demonstrates that it\u2019s important to compare a number of lenders.<\/p>\n Please don\u2019t conclude from the above analysis that ANZ\u2019s borrowing capacity will always be higher than nab\u2019s. There are so many idiosyncrasies with each bank\u2019s policies and as well as differences in individual client circumstances that can change which lender offers the highest borrowing capacity.<\/p>\n The more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.<\/p>\n The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.<\/p>\n But of course, that is nonsensical. If you experienced cash flow pressure, of course you would eat out less often (or maybe not at all). Therefore, maybe the banks should only include a portion of a borrower\u2019s discretionary expenses e.g. say 50% – to make allowance for the fact that you do have the discretion to reduce them in order to meet your financial commitments. Eating out is not a financial commitment!<\/p>\n The diagram below (click to enlarge) charts the monthly volume of total new housing finance commitments (excluding refinances) from 2002, when the data set began, and 2019. I have adjusted the amounts for the impact of inflation. I have compared that to the annualised change in median house values over a rolling 3-year period (for Melbourne, Sydney, Brisbane and Perth).<\/p>\n It is important to observe that credit flows have been relatively volatile \u2013 ranging from $15 billion and $25 billion per month over the period.<\/p>\n\n Result<\/strong><\/td>\n Total income must be greater than total expenses.<\/td>\n Total income is $19,878. Total expenses are $19,484. Surplus is $394. Rick and Karen wouldn\u2019t qualify for any additional borrowings.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n The impact of the recent benchmark interest rate reduction<\/h3>\n
\n\n
\n \u00a0<\/strong><\/td>\n Westpac<\/strong><\/td>\n ANZ<\/strong><\/td>\n CBA<\/strong><\/td>\n nab<\/strong><\/td>\n<\/tr>\n \n Old<\/td>\n $815k<\/td>\n $750k<\/td>\n $800k<\/td>\n $770k<\/td>\n<\/tr>\n \n New<\/td>\n $880k<\/td>\n $900k<\/td>\n No change yet<\/td>\n No change yet<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Living expenses are the real problem<\/h3>\n
Will this loosening in credit policy stimulate property price growth?<\/h3>\n
![\"borrowing](\"https:\/\/i0.wp.com\/wealthcoach.com.au\/stage\/wp-content\/uploads\/2019\/07\/loan-volume-and-price-growth.png?ssl=1\")
<\/a><\/p>\n