Borrowing Capacity Index – May 2023

/ Loanscape/

Loanscape has today released its Borrowing Capacity Index for Q4/2023. It shows that the borrowing capacities of Australian individuals and families continue to decline. The main outcomes:

  • Maximum borrowing capacities are now 30.4% lower than at their peak in October 2021 and remain at their lowest level in more than 4 years.

  • Borrowing capacity has declined a further 4% since February.

  • We forecast a further drop of 3% over next 3 months if RBA increases cash rate by another 0.25% as is widely forecasted.

  • In July 2021 a couple with annual family income of $120,000 could borrow up to $785,000. That same couple can now access a maximum $556,000.

According to AFG data published in April average loan size has decreased by 4.3% (NSW) and 6.8% (VIC) and 4.1% nationally since the market peak in the second quarter of FY2022.

Borrowing capacity declines have been exacerbated by a winding back of lender discounts during the quarter. This is likely due to the banks having to borrow on international money markets to refinance cheap funding provided by the RBA’s Term Funding Facility at the onset of the COVID-19 pandemic.

Consequences for Borrowers and the Property Market

  1. We are meeting many borrowers who took out their loans at the market peak who are now essentially “mortgage prisoners”, unable to refinance their home loan due to not being able to re-qualify for the same loan under current lending criteria. This inhibits their ability to shop around for a new loan if their current lender is not prepared to offer a competitive funding solution.

  2. The relatively modest decrease in average loan size suggests that most current borrowers are taking out loans with substantially less cash flow reserve than when interest rates were low in early 2022.

  3. Some lenders are beginning to introduce more liberal credit policies for borrowers looking to refinance and manage their cash flows.

  4. Many first home buyers are responding to their reduced capacity by looking for properties in lower cost suburbs or towns, or opting to purchase a smaller dwelling.

Forecast

Our forecast is for a further decline in borrowing capacity of 3% over the coming 3 months. This based on assumptions that:

  • RBA cash rate will increase by a further 25 basis points (bps)

  • Lender discounting to decline by a further 10 bps

  • 3-year fixed interest rates will increase by 10 bps

  • Inflation and wage movements to remain on their current trends.

The Loanscape Borrowing Capacity Index is an expression of the relative change in borrowing capacity for singles and couples among a basket of lenders. It factors in:

  • variable and fixed interest rates

  • changes in lending policies of major 1st and 2nd tier lenders

  • changes in lending regulations mandated by the Australian Prudential and Regulating Authority (APRA)

  • household expenditure as measured in the Household Expenditure Measurement Survey (HEM)

  • average family incomes for professionals and non-professionals

  • changes in lender discounting.