Wide variation in stress testing thresholds

New comparative data from Mike Pero Mortgages shows that differences in the stress test thresholds applied by lenders could affect an applicant’s borrowing power by as much as $160,000.

Mike Pero Mortgages CEO Mark Collins says each bank has a different appetite for risk, so what they are seeing is lenders stress testing anywhere from 7% right up to 8.5%.

This means there are big variations in how much both bank and non-bank lenders are willing to lend Kiwi home buyers – and that applies to buyers outside the main city centres too, he says.

“While our numbers may relate more to a buyer in a major city like Auckland, there’s going to be a significant variance in how much each lender will allow you to borrow for any property price.”

He says it is important that borrowers understand every lender is different and that advisers can help them to find the right lender and loan product best suited to their financial situation.

Lenders have the ability to adjust their stress testing levels outside of OCR movements and, in recent years, the banks have “self-regulated” by increasing stress testing levels, Collins adds.

“But now the heat is out of the market, and the LVR restrictions are slowly being relaxed, the banks are open for business again and we might see a relaxing of what’s been a conservative approach to testing loan serviceability.”

Go2Guys’ Campbell Hastie agrees there are big variances in stress testing thresholds, as well as different loadings for living expenses, between lenders but he doesn’t see any relaxing in servicing criteria in the near future.

Hastie says there has been some relaxing of the high LVR thresholds and that does mean there is a bit more appetite for this category of lending.

“A bit more high LVR lending is being done, but I wouldn’t say it is necessarily getting any easier for borrowers.

“The servicing criteria is just as tight as it was before Christmas. That is likely to continue for the foreseeable future and customers need to be aware of that.”

One reason for the variances in stress testing thresholds and servicing conditions between lenders is that tweaking them allows the lenders to manage the cost of their funding, he says.

“But also lenders have to abide by the Responsible Lending Code and have to demonstrate that they are doing the right things for their particular customers.

“Lending money is, ultimately, all about putting a test in front of an individual to make sure that they can pay back what they have borrowed.”