Do you have a big home loan? Is it much greater than you ever imagined? How much is too much?
One of our major banks now has a policy that says an interest only mortgage cannot be greater than a multiple of the gross income of the borrowers. That multiple is rumoured to be six times (6X). While this restriction is currently being applied at one bank for interest-only home loans, I think there’s an argument to say it may be applied more broadly.
Under this new restriction a couple on $100k each would be able to borrow a maximum $1.2M – subject to servicing and loan to valuation (LVR) hurdles being met as well as all the usual requirements from banks.
I would suggest this is not a restriction at all. $1.2M is an enormous amount of money to repay on those incomes. So, I checked the borrowing capacity of the couple on $100k each without the 6X restriction.
To keep things simple and to compare like for like I assumed zero credit card limits as well as no car leases or any other financial liabilities (personal loans, consumer loans etc).
Lo and behold, you would be able to borrow $1.2M on those incomes. In fact, if you remove the six times restriction you would be able to borrow $1.325M…and with all lenders – bar one – you still can. Have I told you that is a tremendous amount of debt for people on those incomes?
Now, we know many of our clients are not on those precise incomes. So, it’s worthwhile doing an exercise for those that are on less and those that are on more. The table below demonstrates the sublime to the ridiculous of big home loans (and yes we do get the entire spectrum and more). Remember this 6X restriction is currently only for those wanting to borrow on an interest only basis (something we try and talk our clients out of).
| Couple | Combined Income | Borrowing Capacity | Borrowing Capacity With 6X Limit |
|---|---|---|---|
| A | $100,000 | $628,000 | $600,000 |
| B | $200,000 | $1,325,000 | $1,200,000 |
| C | $500,000 | $3,386,000 | $3,000,000 |
| D | $2,000,000 | $13,000,000 | $12,000,000 |
*For interest only loans
For simplicity, I have assumed a couple’s income is split evenly. I have also not assumed any LVR restrictions (which is usually applied to more expensive real estate). However, the point of the exercise is to demonstrate what, if any, restrictions are being placed on borrowers.
If your income is greater or less than those quoted in the table above we’re more than happy to provide you with more precise numbers.
Now, apparently only one lender has imposed the 6X income restriction (and announced it publicly). Ordinarily I would suggest that the others will follow. But as you can see from the above it’s not really going to change people’s minds is it? So, instead of a big home loan you have a slightly less big home loan…but your income’s the same.
Why bother?
I’m glad you ask. As I have been informing our readers ad nauseam since May 2015 the regulator is in the market to reduce our banks’ reliance on home loans. In this instance, the banks would have had a stern talking to by the regulator and one of them has moved first so that it doesn’t become a burden later on.
Will the others follow? I suspect they will. I also suspect that income multiples will be introduced in other categories of lending. For example, borrowers with multiple investment loans.
It’s a better way of controlling a segment than with increases in interest rates.
The above is also a good reason why going to one bank is a really silly way of shopping for a home loan. A broker can get you quotes from a whole range of lenders with a whole range of products and a whole range of policies. We’re accredited with over twenty lenders – most of them are listed on our website in our panel of lenders here.
If you have a big home loan or are thinking of entering into a big home loan do your calculations well. Speak to a professional about what you can afford.
Call your broker for a calculation or a product comparison before you go shopping for a property.
Note, if your big home loan is causing you stress, anxiety or depression (a topic we’ve previously discussed here), please seek help (psychological, medical and/or financial) immediately.