Borrowing Capacity Index – August 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 30.5% lower than at their peak in October 2021 and remain at their lowest level in more than 5 years.

  • Borrowing capacity has declined a further 3.5% since May.

  • We forecast a levelling out over the next 3 months as the RBA places a hold on the cash rate and fixed interest rates begin to trend down.

  • 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 $536,000.

  • Since January 2022 the family income required to qualify for the average sized loan has increased by 29%.

According to AFG data published in July average loan size has decreased by 5.7% (NSW) and 5.9% (VIC) and 3.5% nationally since the market peak in the second quarter of FY2022.

Consequences for Borrowers and the Property Market

  1. Many borrowers who took out loans at the market peak 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 continuing competitive funding solution.

  2. Most of the major banks have introduced more liberal credit policies for borrowers looking to refinance but these are not always associated with the lowest interest rates.

  3. The relatively modest decline of only 3.5% in the average loan size points to a shift in WHO is buying property and taking out or refinancing a mortgage. The family income required to take out the average sized home loan in February 2022 was $106,500. The family income required to take out the (lower) average sized loan in August 2023 is $137,200; an increase of 29%.

Forecast

Our forecast is for a levelling out of borrowing capacity over the coming 3 months. This based on assumptions that:

  • RBA cash rate will remain unchanged

  • Lender discounting to remain unchanged

  • 3-year fixed interest rates will decrease to a level just below prevailing variable rates

  • 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.