Loans and the lending market: what do tighter lending conditions mean for me?

With Australia's house prices continuing to fall and banks imposing stricter conditions on borrowers, trying to buy a new property or sell your home can be a challenge.

According to CoreLogic research, Sydney house prices experienced their steepest decline since 1983 last year at 8.1% while Melbourne values dropped by 5.8%, the largest since 2009. The decline is also affecting other cities across all price brackets and isn't showing signs of easing.

This doesn't mean you should avoid buying or selling a home until the situation improves, but it is important to know what lenders expect from borrowers so you can make sure you qualify.

What are the restrictions on lending?

While Australia's previous housing downturns were part of a general economic decline, the current crisis is being blamed on strict lending conditions imposed on banks since 2014. These measures by the Australian Prudential Regulation Authority (APRA) were designed to stop banks offering high-risk, bad-credit loans that can lead customers into spiralling debt.

These restrictions have already begun to ease, with APRA lifting its cap on interest-only mortgages in January 2019 for banks that had improved their lending behaviour. However, this is not expected to have a significant impact in reversing market trends, and mortgage rates are expected to remain high throughout the year.

How do these restrictions affect me?

If you're buying or selling a home in Australia, current restrictions on lending could make things more difficult, but not impossible. Banks are being forced to reject more loan applications, interest rates are rising and borrowing amounts are falling, which has the knock-on effect of lowering house prices.

If you're applying for a home loan, it's important to know what criteria banks use when evaluating your suitability. This can include:

• Age – you must be at least 18 years of age to take out a mortgage. If you're over 55, you may have more trouble getting approval, especially for a shorter-term loan.
• Residence – permanent residents of Australia are more likely to be approved than non-residents. Non-residents may still be approved, but usually for a reduced amount.
• Income and expenses – whether you're employed, self-employed, living on a retirement income or other source of finance, your bank will want to see evidence of a stable income and your outgoings.
• Assets and liabilities – property or other high-value assets will improve your chances of being approved, while large debts will count against.
• Credit score – lenders can access your credit report to see your positive and negative credit history. You can get a free copy of your credit report through an approved agency to check for any errors or areas you need to improve.

When will the situation improve?

If you're waiting for house prices to rise again before you sell a family home and downsize, you may have a long time to wait. Analysts including JP Morgan are expecting lending conditions to remain relatively unchanged in the near term, which will see house prices fall at a faster rate throughout 2019.

If you're worried about the housing market and you need some support or advice, conveyancing solicitors can help. To find out how, click the image below to download our free ebook Downsizing your home: selling and downsizing tips for seniors.