Why is it so hard to get a home loan lately?

Since May 2022 the RBA has increased the RBA Cash Rate by 4.25%. The increase in rates has meant that the rate used by lenders to determine whether a customer can service a loan or not has also increased by roughly 4.25% meaning that the amount you could borrow in April 2022 is was substantially more than the amount you can borrow today because you are borrowing at a higher rate. If you take a $500,000 loan at a variable rate of say 2.5% vs current rates at around 6.2% the difference in repayments per month is $1,086 per month ($1,975 vs. $3,062). So you would need another $12,000 per annum to service the loan. If your income (salary) hasn't changed or not increased by as much, your ability to borrow will reduce because the monthly repayments have increased due to interest rate increases. Lenders need to be responsible in how much they will lend a borrower and ensure that borrowers can pay back what they borrow within the agreed timeframe. So as the repayments take up more of your salary because of interest rate increases, it also impacts how much you can borrow.

During the royal commission in 2018, there was a great deal of time spent focusing on the banks’ lending tests being too loose. For example, most banks failed to verify the living expenses of home loan applicants, instead they use Household Expenditure Measure (HEM) to estimate living costs to reflect what you spend your money on. This led to many cases of people receiving loans that they were unable to repay. ASIC promised greater scrutiny of lending practices in response to the Royal Commission results. And lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive. Australia has also experienced a property boom, which after the peak, falling property prices has also created a greater risk for the banks. One way to reduce this risk is to require a higher deposit, which extends the time it takes to save that deposit. At the same time, the increasing interest rates, banks check on their borrowers’ ability to service their loans when there is a significant increase in interest rates. So, while it may be possible to borrow at an interest rate of less than 4% per annum, the banks need to check that the loan is still affordable at a rate of more than 7%. The amount that can be borrowed is massively decreased as a result. Unless you are able to increase your income, you’ll need to save more, which inevitably means spending less.