Borrowing Capacity Index – May 2024

/ LOANSCAPE/

Loanscape has today released its Borrowing Capacity Index for Q3/2024. It shows that the borrowing capacities of Australian individuals and families are now starting to recover after the sharp decline over the previous 2 years. The main outcomes:

  • Maximum borrowing capacities remain 28.4% lower than at their peak in October 2021.

  • Capacity is now increasing modestly - the index has gained 3.0 points over the past 6 months.

  • We forecast a substantial increase of more than 4 points over the next 3 months as we expect interest rates to remain stable while net incomes increase from 1st July .

  • 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 $538,000.

  • Since January 2022 the family income required to qualify for the average sized loan has increased by 37%.

According to AFG data published in April average loan size in Australia has increased by 0.8% during the past quarter. This increase has been uniform across all states although WA experienced the largest quarterly increase of 1.9% and the largest annual increase of 8.4%.

rate movements

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. Banks are moving quickly to factor in the cuts to income taxes which will start from 1st July. For borrowers seeking variable rate loans this will enable them to access up to an additional 5% in borrowings.

  3. The family income required to take out the average sized home loan in February 2022 was $106,500. This has increased by 37% to $146,000 in May 2024.

  4. There remains a strong disparity between calculated borrowing capacity and average loan size. While borrowing capacity is down 28% from the market peak the average loan size has remained constant in most states, and has declined only slightly (4%) in NSW. This suggests that lower income borrowers remain the most severely impacted.

  5. Prospective first home buyers remain particularly affected: they now comprise only 12% of all mortgage applications. Government initiatives ostensibly aimed at supporting them (or at least garnering their votes) such as stamp duty relief, and the First Home Guarantee Scheme are actually making home ownership less attainable for the majority. Shared equity schemes will only throw more fuel on the same fire, albeit they allow facilitate access to housing equity for a category for individuals and couples who have no alternative to renting.

Forecast

Our forecast is for borrowing capacity to improve substantially over the coming 3 months. This is based on assumptions that:

  • RBA cash rate will remain unchanged (this is the forecast of all of the 4 major banks)

  • Lender discounting to remain at its current levels

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

  • Increase in net incomes flowing from the tax cuts to be implemented on 1st July.

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.

  • Changes to income tax rates