Borrowing Capacity Index – February 2024
/Loanscape has today released its Borrowing Capacity Index for Q2/2024. It shows that the borrowing capacities of Australian individuals and families have stabilised after the sharp decline over the past 2 years. The main outcomes:
Maximum borrowing capacities remain 30.1% lower than at their peak in October 2021.
Capacity is no longer declining - the index has gained 2.3 points over the past 6 months.
We forecast further slight increase over the next 3 months as the RBA places a hold on the cash rate and fixed interest rates trend down in anticipation of the RBA lowering the cash rate in the second half of this year.
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 35%.
According to AFG data published in January average loan size has increased by 3.3% during the past quarter. This increase has been uniform across all states with WA experiencing the largest quarterly increase of 6.7%.
Consequences for Borrowers and the Property Market
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.
Major banks continue to respond with more liberal credit policies for borrowers looking to refinance but these are not always associated with the lowest mortgage interest rates.
The family income required to take out the average sized home loan in February 2022 was $106,500. The family income required to take out the average sized loan in February 2024 is $144,000; an increase of 35%.
There remains a strong disparity between calculated borrowing capacity and average loan size. While borrowing capacity is down 30% from the market peak the average loan size has remained constant in most states, and has declined only slightly (3%) in NSW. This suggests that lower income borrowers have been pushed out of the market.
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. The proposed shared equity scheme will only throw more fuel on the same fire.
Forecast
Our forecast is for borrowing capacity to improve slightly over the coming 3 months. This based on assumptions that:
RBA cash rate will remain unchanged (this is the forecast of al of the 4 major banks)
Lender discounting to remain at its current levels
As forecast in November, 3-year fixed interest rates have started to decrease as money markets anticipate the easing of interest rates later this year. We expect this trend to gather momentum over the next 3 months..
Inflation and wage movements are expected to remain on their current trends.
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.
