Australia's riskiest suburbs for home loans revealed as banks push for higher deposits

Australia's riskiest suburbs for
home loans revealed as banks
push for higher deposits
By Kathryn Diss

Updated about an hour ago

PHOTO: The credit squeeze is forcing people to fork out bigger deposits to get a home loan approved. (ABC
News: Nic MacBean)

A new crackdown on property lending has emerged in the
wake of the Banking Royal Commission, with borrowers now
being asked for deposits of up to 30 per cent and banks
throwing greater scrutiny on location and living expenses
when assessing loans.
Key points:
   Data showing the riskiest suburbs in each city has been revealed
   Location is a factor banks are increasingly looking at when assessing home loans
   Finance experts say the current environment is particularly hard for borrowers
The pull back on new finance comes in the wake of a scathing
assessment of the nation's banks delivered by Commissioner
Kenneth Hayne.
But the squeeze on credit has coincided with tumbling house prices
on the east coast, creating what analysts have branded a "perfect
storm" for borrowers trying to access finance.
While the biggest changes to lending standards happened between
2015 and 2017, banks have continued to bolster their assessment
processes, now giving a specific focus to the living expenses of
borrowers.

In addition, data obtained by the ABC shows the suburbs that
lenders deem the most risky across Australia — a so-called
"blacklist" of areas where location is deemed more of a liability to
people seeking a loan.
In the new lending environment, one of the biggest shocks for
borrowers is that the crackdown applies not just when accessing
new credit, but also when refinancing existing loans.
This comes as some households are being hit by a surge in
repayments as interest-only loans expire, triggering the need to
begin paying down the principal amount borrowed that can add
hundreds of dollars to monthly repayments.
"It's probably been the most difficult time to acquire money in a long
     time, so a lot of people are probably being caught off guard,"
   Momentum Wealth team leader of finance Caylum Merrick said.
"It's a bit of a perfect storm … with the Banking Royal Commission,
that's provided a whole other raft of challenges for borrowers
regarding serviceability."

PHOTO: Caylum Merrick said the aftermath of the Banking Royal Commission had presented a number of
challenges for borrowers. (ABC News: Kathryn Diss)

An increasing number of people have begun approaching brokers
like Mr Merrick, unable to service their loans or meet the new
criteria demanded by the banks.
"The big thing is the way the banks are assessing loans at the
moment is a lot different to what it was three to four years ago," he
said.

"And a lot of clients probably don't understand that's changed and
are finding all of a sudden they can't borrow as much as what they
once [could]."

The nation's riskiest suburbs
Banks are increasingly looking at location as one of the factors
when approving new loans, marking down areas where there is a
glut of housing supply, a downturn in the economy or the housing
market has been particularly stagnant.
While it is difficult to source information on where the new
standards are being applied, data company Digital Finance
Analytics (DFA) has assessed which suburbs banks, including
some of the majors, deemed as "higher risk".
The data set — which the firm calls the "blacklist" — is based on
criteria such as unsuccessful loan approvals or areas where finance
has been harder to obtain.
In the higher-risk suburbs, banks have applied tighter lending
criteria and required borrowers to find larger deposits to avoid
paying costly mortgage insurance on top of their loans.
Perth is the capital city that tops the nation for the riskiest suburbs,
and regional Western Australia is also home to the vast majority of
blacklisted postcodes.
EMBED: Perth's riskiest suburbs

The three riskiest suburbs in the country as assessed by DFA all fall
within regional WA.
Newdegate, Bodallin and Pithara were each assigned the nation's
highest risk score of 46.1, compared with 27.9 for Perth, 17.5 for
Melbourne and 11.4 for Sydney.
EMBED: The riskiest suburbs map

Brisbane and Adelaide, which have both seen limited property
growth in recent years, are close behind Perth in terms of risk to
lenders.
EMBED: Brisbane's riskiest suburbs

EMBED: Adelaide's riskiest suburbs

While Melbourne and Sydney have led the nation in housing market
growth in recent years, a downturn stretching for more than 18
months has resulted in the number of risky suburbs in both cities
starting to increase.
EMBED: Sydney's riskiest suburbs

EMBED: Melbourne's riskiest suburbs

Hobart has defied the national property downturn in recent years,
but the latest figures from property monitoring firm CoreLogic and
the Real Estate Institute of Tasmania show the city's property boom
is officially over.
EMBED: Hobart's riskiest suburbs

Lending crackdown adds thousands to
loans
Location is not the only hurdle aspiring homeowners face when
securing finance.
Some banks are now insisting borrowers find deposits of 30 per
cent or more to avoid paying costly lenders mortgage insurance
(LMI).
The more you borrow, the higher the risk to the bank, which is why
lenders charge LMI to protect themselves against default.
The cost of this insurance is passed on to the borrower, adding
thousands to the cost of a home loan.
The stock-standard trigger for the insurance to be applied was
historically a loan greater than 80 per cent of the property's value —
known as an 80 per cent loan-to-value ratio (LVR).
Property outlook for 2019

Policymakers have embarked on the delicate task of deflating a property bubble without bursting it — this year
we'll find out if they've succeeded.

But since the crackdown on credit, banks have begun lowering this
threshold.
"There are specific securities the banks will consider more high-risk,
so they will apply different policies to those different securities," Mr
Merrick said.
"That might be apartments situated in a particular postcode where
there's a lot of supply and they're looking at it from a risk mitigation
point of view.
"So they might apply a maximum LVR of 70 per cent to that
property — anything over that, you're required to pay lenders
mortgage insurance."
Mr Merrick said the criteria hadn't always been so strict, and
borrowers needed to understand that being previously approved for
a loan didn't exempt them from the strict new criteria.
"So if you bought the property with a 20 per cent deposit, 80 per
cent LVR, all of a sudden you go to refinance that and it's all
changed," he said.
"You're required to kick in more of your cash to just move from one
                          bank to another."

Banks have become 'too difficult'
Amanda Bearcroft said she was trying to sell a property on the
Hawksbury River, north-west of Sydney, but the couple keen to buy
her house were told they had to find a 35 per cent deposit.
"At first they were told it would be 30 per cent, then the banks finally
came back and said it was 35 per cent right at the very end," Ms
Bearcroft said.
"They also went through their statements for the past year I believe
right down to the smallest expenses, including a $9.70 charge on
the statement which turned out to be a coffee and banana bread,"
she said.

PHOTO: Some banks are now insisting borrowers find a 30 per cent deposit to avoid paying costly Lenders
Mortgage Insurance.(ABC News: Ian Cutmore)

Ms Bearcroft was concerned she now would not be able to sell the
property.
"The banks have just got too difficult to borrow money off," she said.
"We're really going to need a cash buyer to come in and people
don't have that cash just lying there. It's really difficult.
"Everybody that's come through and have been interested have
been told they are required to pay 30 per cent."

Credit growth nosedives
In its latest Financial Stability Review released in April, the Reserve
Bank of Australia (RBA) reported recent measures to reduce high-
risk lending had curbed the maximum loan sizes available to most
borrowers.
The RBA has labelled housing credit conditions as being "tighter
than they have been for some time", which has led to a nosedive in
credit growth for both investor and owner-occupier loans.
EMBED: Housing credit growth nose dives

Over the course of 2019 lenders would be able to access additional
information on personal credit and mortgages of borrowers due to
an expansion of credit reporting, which the RBA expected could
lead to further tightening.
Fewer than 7 per cent of loans are now issued with a deposit of less
than 10 per cent, while new interest-only lending has fallen to about
16 per cent of total loan approvals.
EMBED: Share of 10% deposit loans decreasing

EMBED: Interest only loans collapse

The number of loans with lending above 90 per cent has roughly
halved over the past five years, while four out of five loans were
now issued with a deposit of at least 20 per cent or more.

Goalposts shift for homeowners
Experts say the two main challenges of lending are a borrower's
equity position (the value of the property) and their availability to
service the loan (how easily they can make repayments).
If the property market is going well, then borrowers only have one
challenge — meeting the loan repayments. But the situation
worsens in a falling market.
Perth homeowner Julia Ewert has been hit by the lending
crackdown and said she felt the goalposts had suddenly moved.
"When I came to refinance … I was told in short there was nothing
they could do anymore," she said.

PHOTO: Julia Ewert said she could not renew her interest-only loan, and was rolled over to principal and
interest. (ABC News: Evan Morgan Grahame)

"My interest-only term had expired and they had to roll me over to
principal and interest.
"I've always been able to roll over my interest-only term when that
expires … and now they've said, 'You can't do that anymore'."
Ms Ewert said she and her husband could not afford the $900 jump
in monthly repayments required under the new lending standards
and had been forced to sell their investment property in Perth's
south-east.

"We've got two young children, a two-year-old and a four-year-old,
so the stability is everything to us, it determines every decision we
make as a family," Ms Ewert said.
   "This is not something I want to sell, I've had this property for 10
                  years. I'm selling because I have to."

Credit squeeze catching borrowers by
surprise
Ms Ewert's tale was becoming increasingly common across the
country as homeowners struggled to pay their loans amid an
environment of tumbling prices.
Sydney and Melbourne have suffered the greatest prices falls most
recently, but the soft conditions on the east coast were dragging
down growth in other markets around the country.
"Values are off 18 per cent in Sydney, which is an important
number because that takes away 20 per cent growth on the way up
in a market," property analyst Gavin Hegney said.
"So for those buyers, they are now probably in negative equity
situations and are probably feeling a little bit uncomfortable.

PHOTO: Property analyst Gavin Hegney said the drastic change in lending conditions had affected the market
significantly. (ABC News: Kathryn Diss)

"We'd have to go back to the mid-1970s before we had the last
credit squeeze in Australia.
"Although banking has been tight before, it's just been the drastic
change — where it's gone from quite liberal lending to quite tight
lending over such a short period of time — that's caught quite a few
people unaware and affected the market quite significantly."

Interest-only expiry the next big
challenge
The situation is only expected to worsen, with the RBA estimating
about $120 billion of interest-only loans were scheduled to convert
to principal and interest repayments this year.
Most of these loans were written before 2015, when lending
standards were weaker, and the RBA was concerned it could prove
challenging for borrowers to meet the step-up in payments.
A perfect property storm

A surge in repayments is set to hit interest-only home loans over the coming 12 months.

The Australian Prudential Regulation Authority attempted to cool
the overheated property markets of Sydney and Melbourne in 2017
by curbing investor loans.
The measures — which led to a more than 90 per cent drop in the
growth of investor loans — had since been lifted, but the effects of
the policy were still being felt.
The ABC contacted the major banks for comment and all said they
had responsible lending practices in place.
They said they took a range of factors into consideration when
approving a loan, including the type and location of the property,
and the borrower's living expenses.
The Commonwealth Bank of Australia did not comment on whether
it had changed its threshold for when LMI applied, but stated on its
website that some borrowers might have to pay the insurance if
they borrowed more than 70 per cent of the property value in
certain postcodes.

Westpac said it had recently bolstered its processes for recording a
borrower's living expenses, including accounting for costs such as
pet insurance, gym membership fees and media streaming
services.