Westpac tightens mortgage underwriting

Westpac has raised its loan serviceability hurdle, increasing the minimum assessment rate 30 basis points from 6.8 per cent to 7.1 per cent, as part of a move to tighten its mortgage underwriting.

The minimum assessment rate is now at least 210 bps higher than the mortgage interest rate, which means that a loan applicant will have to demonstrate that they can continue to service the loan if rates rise by 210 bps or more.

The new minimum assessment, or floor rate, applies to owner-occupiers and investors. It applies to all the applicant's mortgage debt, not just the loan being applied for.

Certain forms of income, including dividends and rental income, are subject to discounts for the purposes of the test.

Westpac chief financial officer Peter King said the bank was also setting ten per cent growth as a "hard limit" for investor property lending and it was tightening its rules covering non-resident borrowers.

Among the big banks Westpac has a high proportion of property investor borrowers, at 46.3 per cent of its mortgage portfolio, so the decision to tighten may cost it some market share.

The bank has taken the decision to tighten despite presenting plenty of evidence in yesterday's half-year financial report that its mortgage portfolio is in good shape.

Seventy-three per cent of its customers are ahead of scheduled mortgage repayments, with 23 per cent of those more than two years ahead. The bank has $26.8 billion in mortgage offset account balances - up from $20.8 billion a year ago.

The bank's average loan-to-valuation ratio at origination is 70 per cent and on current balances is 43 per cent. On current balances, 94 per cent of loans are on LVRs below 80 per cent.

Australian mortgage portfolio losses were $38 million during the March half, representing two basis points of the book. This is low by international standards.

The majority of investor property loans are interest-only, which are assumed to be higher risk. The bank does not agree with this assessment, saying its interest-only loans run off at the same rate as principle and interest loans.

Interest property loan losses are two basis points of the portfolio - the same level as the total portfolio.

Westpac's aim is to grow its mortgage book in line with system. It did that in the September half last year but it dropped back to 0.9 times system during the latest half.

Its latest underwriting measures won't make the task of growing share any easier. However, the bank said it has been taking steps to increase its share in the owner-occupier segment, including making use of its family of brands more strategically.