The Commonwealth Bank will tighten lending criteria on selected “hotspot” suburbs from Monday by requiring buyers with a deposit of less than 30 per cent of the property value to pay lenders’ mortgage insurance.
Lenders’ mortgage insurance (LMI) protects lenders for shortfalls should the property be repossessed and sold for less than the outstanding debt. Though it benefits lenders, the premium is paid by borrowers.
It is virtually compulsory for anyone buying property with a big lender who had less than a 20 per cent deposit to pay LMI.
It can cost several thousands of dollars and is usually added to the loan, increasing repayments and reducing borrowing capacity.
Though the change affects all borrowers, it is first-time buyers who usually struggle to save the 20 per cent deposit to avoid paying for LMI.
“With many first-time borrowers struggling to save a 20 per cent deposit as it is, this latest move comes as a big blow and one that puts the great n dream further out of reach,” said Bessie Hassan, a spokeswoman for comparison site Finder.
Existing CommBank borrowers, including those with mortgages in properties in hotspots, are not affected. And those assessed as “conditionally eligible” by close of business this Sunday will proceed under existing criteria.
However, the bank said those seeking to “top up” their existing mortgage will be covered under the new criteria from Monday.
For property investors, in addition to the change regarding LMI, the bank said the usual 80 per cent of rental income that is used to calculate if the applicant can service the mortgage could be lowered for those buying in hotspots.
It also said that for some properties in selected postcodes, negative gearing will not be allowed.
Negative gearing is where where the income from rent from the property is less than the costs of the investment, a large component of which is the interest on the mortgage.
The losses on the investment can be offset against the borrower’s other income, usually salary, to reduce the income tax they pay.
Peter White, executive director of the Finance Brokers Association of , who has been in the industry for almost 40 years, said the move by the bank to make more borrowers pay LMI is “unprecedented territory”.
He said that as CommBank is the largest mortgage lender, there is a chance the other big banks could follow.
A spokesman for the bank said the changes do not affect any postcodes in Sydney ot Melbourne, and although declining to name them, he said it affected only a small number of postcodes.
Lenders have been tightening their lending criteria for apartments in the inner Brisbane area and in the mining towns of regional Western , where prices have been falling following the mining boom.
They have been tightening their lending criteria, particularly to property investors, over the past two years at the behest of the banking regulator.
The LMI calculator on the Genworth website shows that the costs of LMI can be significant. A first-home buyer with a $25,000 deposit on a $500,000 house (a deposit of 5 per cent) would pay almost $16,000.
While it is a one-off premium, most lenders capitalise the premium on to the mortgage.
Paying back an LMI premium of almost $16,000 over 30 years adds an extra $80 a month to repayments, reducing the home buyer’s borrowing capacity.
Under the same scenario, but with a deposit of $125,000, or 25 per cent, the LMI would be almost $2,000 or an extra $9 per month.
Finder’s Hassan said it remains to be seen if other lenders will follow CommBank, but borrowers with a deposit of less than 30 per cent should shop around.
She said there are some “non-bank and online lenders” who will lend to borrowers with deposits of only 5 or 10 per cent.