I’ve just been alerted
by Banking Day (a subscriber-only service)
that Westpac–via its subsidiary St
George–is now allowing potential borrowers to treat their
rental payments as “evidence of genuine savings” when applying
for a home loan.
This is of course portrayed
as good thing in the press release that announced the
development–issued by the broker Loan Market (see
the press release at the end of this post). It will, they state, enable
Australians who currently can’t afford to buy a home–because they
can’t save a deposit–to do so. All good news.
The more cynical
interpretation is that this is a way to let banks increase their maximum LVR
(loan to valuation ratio) without actually saying so, and to expand their
pool of potential borrowers as a consequence. At present, you need a $30,000
deposit to bid $1 million for a property if you get a loan from the
Commonwealth Bank, which currently has one of the highest maximum LVRs of
97%: “The maximum we will lend you is 95% of the valuation amount. We
also add the Lenders Mortgage Insurance
or a Low Deposit Premium
to your loan (up to a maximum of 97%), so it doesn’t cost you anything
upfront”.
This press release implies
that you could approach St George with $20,000 in savings, be given a $1
million loan, and have it recorded as a 95% LVR loan (since St George
probably has the same maximum published LVR as Westpac of 95%) where $20,000
was your actual deposit and the effective LVR was actually 98%.
The effect of this trick is
to expand the pool of potential borrowers to whom St George can extend a
loan, while appearing not to alter its lending standards.
There’s at least one
line that I agree with in the following press release: “This is a major
step forward which will also boost activity in the struggling home finance
sector and we expect other lenders to follow suit.” It will enable the
banks to meet their loan sale targets, by expanding the number of applicants
who qualify for a loan.
To me, this move smacks of
desperation. The house price bubble has made entry into the market impossible
without sky-high LVRs, and this in turn has undercut the banks’
business model. Increasing their maximum LVRs by around 5% back at the
end of August apparently wasn’t enough to secure the level of loans
business they wanted, and St George’s response is this ruse that gives
a higher LVR without calling it such.
It will be interesting to
see how regulators treat this: will they allow rent that you’ve already paid to a
landlord to be recorded as “evidence of genuine
savings” and pretend that St George hasn’t increased its maximum
LVR?
The
Loan Market Press Release
RENTAL HISTORY CAN NOW HELP
OBTAIN HOME LOAN
December 22, 2010
Call For Banks To Recognise
Rent Answered
Repeated calls by
Australia’s largest independently owned mortgage broker Loan Market for
banks to allow people applying for a home loan to use rental payments as
evidence of genuine savings has been answered by one of the nation’s
major lenders.
Loan Market Chief Operating
Officer Dean Rushton said St George had become the first Australian bank to
change its requirements in regards to rental payments, in a move which will
provide much needed assistance to first home buyers.
Mr Rushton said St George
will accept rent as a form of savings for a home deposit if there is evidence
of a minimum of 12 months’ continuous, satisfactory rental history and
the property is leased through a licensed property manager.
“This is a significant
breakthrough for first homebuyers and a move which could be a major boost to
the home finance industry,” Mr Rushton said.
“Higher interest rates,
tougher lending conditions and the end of the boosted federal government
grant at the end of last year have driven first time buyers out of the
market.
“Another major
restriction for them has been the difficulty in saving a deposit for a home
loan, particularly in this economic climate with people having to cope with
massive cost of living increases including rental payments.
“Australian lenders
require a percentage of the purchase price – normally five per cent
minimum – to be saved for all loans but it is extremely difficult for
people paying the exorbitant rents customary these days to save money.
“But if rental
payments were taken into consideration as a factor in assessing genuine
savings that would enable many people to pursue the dream of home ownership.
“St George has now
moved to accept rental history as a form of genuine savings and they should
be applauded for this decision as it will enable a lot more people to realise
the great Australian dream of home ownership.
“This is a major step
forward which will also boost activity in the struggling home finance sector
and we expect other lenders to follow suit.”
Steve Keen
DebtDeflation
Steve Keen is associate professor at the University of
Western Sydney School of Economics and Finance. As an economist, he does
something very unusual : he treats money seriously, and as a result he gets a
very different result on how the economy operates.
