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Sources in the banking and mortgage industry say that two of Australia’s biggest banks have quietly loosened some of their rules on home loans, even though the government has been warning people to be careful in recent months because of a falling real estate market.

Rental Income For Mortgage Assessments

Four sources said that banks are now less strict about how they count expected rental income when deciding whether to give a loan. The changes make it easier for people looking for investment loans who get a lot of money from renting to borrow money. In September, about one-third of the new mortgage loans from banks were for investments.

Australia’s third-largest home lender, Westpac Banking Corp. (WBC.AX), cut a discount on assessed rental income from 20% to 10% in May, according to three sources. The number two bank, National Australia Bank Ltd (NAB) (NAB.AX), has started taking income from short-term rentals again, like those booked through Airbnb Inc (ABNB.O), two sources said. In 2020, the news said that NAB had stopped doing this. On November 12, NAB will also cut its discount on rental income in half, from 20% to 10%. This includes short-term rentals like Airbnb.

APRA Response To Lending Standards

According to advice from the Australian Prudential Regulation Authority (APRA) that has been occurring for a long time, banks should take at least 20% off the rental income reported by mortgage applicants to make up for times when properties are empty. A Westpac representative said that the bank changed its credit policy from time to time and that “any proposed change is put through a robust process to make sure it’s fit for purpose.”

Australia and New Zealand Banking Group (ANZ) (ANZ.AX), one of Australia’s four largest banks, also takes a 10% cut from rental income when assessing servicing on loans. A fifth source said it had been doing so since September 2020. In an email, a spokesman for ANZ said, “We set our risk appetite and policy with care and diligence. We review our lending policies and guidelines on a regular basis to make sure we are staying within our risk tolerance and lending responsibly, including meeting APRA prudential standards,”.

APRA declined to comment but pointed to a letter it sent to lenders in June. The letter said, “In the current environment, with high household debt and rising interest rates, it is important that (lenders) are prudently managing risks in residential mortgage lending.” This year, the Reserve Bank of Australia has said many times that there aren’t many risks to the financial stability of the country as a whole, but it’s still important for lenders to keep good lending standards.

Falling House Prices

Since May, seven increases in interest rates have taken some of the heat off one of the most expensive real estate markets in the world. Since then, Australian banks have been fighting to get a bigger share of a loan pool that has been their main source of income for a long time. In August, prices fell 1.6%, which was the most in 40 years. In September, prices were down 1.4% from August.

Commonwealth Bank Response

Commonwealth Bank of Australia (CBA.AX), which has a quarter of the mortgage market, is the market leader. NAB, Westpac, and ANZ are next in line. A sixth source said that Commonwealth still takes 20% off mortgage applications if the applicant has rental income. “Banks have a lot of power and know-how in the mortgage business, so most people trust what they say about how much they can borrow,” said Tom Abourizk, a senior policy officer at the Consumer Action Law Centre. “As interest rates and the cost of living go up, banks should be more careful than ever to make sure they don’t give out mortgages that people can’t pay for and set them up to fail,” he said, referring to the changes to how rental income is calculated.

Mortgage Defaults

Recent bank earnings showed that the number of late and bad loans was close to a record low. However, financial analysts say that these numbers are likely to go up in 2023 when inflation, higher interest rates, and a rise in unemployment all hit. “It takes time for the impact of the rate increases to hit people and make them realise what they can and can’t afford,” said Nathan Zaia, a banking analyst at Morningstar. “People might have A$10,000 to A$15,000 in savings, dig into it and only realise in time that they can’t manage it anymore.”


With further rate rises anticipate, it will be a wait and see approach with how lender’s credit policies will further evolve to accommodate these changes. While some of these changes may assist borrowers, they should ensure a full assessment is carried out before taking on additional borrowings, to account for rising rates and lowering house prices.