Borrowing Capacity Index – November 2023

/ LOANSCAPE/

Loanscape has today released its Borrowing Capacity Index for Q1/2024. It shows that the borrowing capacities of Australian individuals and families continue to decline. The main outcomes:

  • Maximum borrowing capacities are now 32.5% 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 5.5% since February.

  • 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 $520,000.

  • Since January 2022 the family income required to qualify for the average sized loan has increased by 32%.

According to AFG data published in October average loan size has decreased by 6.9% (NSW) and 3.9% (VIC) and 3.1% 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 remain “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. Major banks continue to respond with more liberal credit policies for borrowers looking to refinance but these are not always associated with the lowest mortgage interest rates.

  3. The relatively modest decline of only 3.1% in the average loan size continues to show that Australians on lower incomes are increasingly being dealt out of the property market. 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 $141,000; an increase of 32%.

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 (this is the forecast of 3 of the 4 major banks)

  • Lender discounting to be wound back slightly as the impact of highing lending costs filters though

  • 3-year fixed interest rates to decrease slightly as expectations grow that the next movement in the official cash rate will be down.

  • 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.