It will become even harder to get a mortgage after the banking royal commission with lenders to be told to do more to check customers' living expenses.
Banks have already tightened lending standards during the year-long inquiry and on the back of regulator restrictions, but commissioner Kenneth Hayne QC’s final report is expected to lead to further restrictions in the availability of credit.
Mr Hayne is expected to apply a rigorous interpretation of responsible lending standards, which will make it harder to get a home loan and restrict practices that have led to banks lending too much money.
Banks will have to do more to verify customers’ income and their actual living expenses, rather than relying on the household expenditure measure (HEM) benchmark in assessing mortgages, as well as car loans and credit card limit increases.
UBS banking analysts said the further tightening of the verification process will likely involve a cap on the usage of the HEM benchmark or its removal entirely.
It will also mean homebuyers cannot borrow as much money.
UBS estimated maximum borrowing capacity has so far been cut by 10 to 15 per cent and could reduce in total by 30 per cent.
“We expect there to be a step down in borrowing capacity as banks begin to receive comprehensive credit reporting data, particularly on borrowers’ total debts outstanding,” the analysts said in a research note.
Ratecity research director Sally Tindall said the regulator’s restrictions on investor and interest-only lending in recent years and emphasis on the importance of borrowers’ capacity to service a loan have already had an impact.
But “the big stick” of the royal commission made the banks stand up and take notice of the rules, regulations and guidelines and really tighten serviceability, she said.
“I think the banks have been lending prudently over the last year and they have taken this very seriously,” Ms Tindall said.
Ms Tindall questioned how much more serviceability requirements could be tightened without leading to a significant restriction in credit.
“No one wants to see the restriction of credit to the point where it is upsetting the economy, so it’s a balancing act.”
Financial Rights Legal Centre coordinator Karen Cox also believed banks had taken steps in the right direction around responsible lending, but described the royal commission as an opportunity to put lending back on a sustainable footing.
“I don’t believe there is no one they can lend to,” Ms Cox said.
“There are plenty of people who would qualify for loans, maybe they wouldn’t qualify for quite as big a loan as they would have got before, but definitely there’s a lot of room for reining that in without us getting to the point where credit isn’t available.”
The Australian Prudential Regulation Authority, which has removed its temporary lending benchmarks for most lenders, this week said banks have lifted the quality of their lending standards.