Failure of banks doing stress tests

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Forums › Finance and wealth management › Failure of banks doing stress tests

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#3027446 26-Jan-2023 12:11

MikeAqua:

I've personally found that when banks have told me how much we could borrow (based on income, outgoings etc) it was horrifying amount. The banks have been comfortable lending 50% more than I'm comfortable borrowing.

This was also my experience. I worked for 12 years as a corporate financial analyst so I am fortunate enough to be able to build my own financial model with sensitivity analysis in order to make my own assessment of what I can afford. When I used various banks' online calculators the results were highly variable between banks, but most of them appeared likely to be willing to lend substantially more than I believe I can afford.

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#3027448 26-Jan-2023 12:20

alasta:

This was also my experience. I worked for 12 years as a corporate financial analyst so I am fortunate enough to be able to build my own financial model with sensitivity analysis in order to make my own assessment of what I can afford. When I used various banks' online calculators the results were highly variable between banks, but most of them appeared likely to be willing to lend substantially more than I believe I can afford.

Same here, finance professional, built ourselves cashflow model to try and figure out what our maximum affordable repayments were on what we'd borrowed that would also still let us accumulate a buffer as insurance for when the rates does come off fixed in case they were any higher. Had we not taken this approach, we'd be in real trouble next year, and still have only paid off the minimum amount on our loan.

Fortunately this will give us the flexibility to take a short term fixed or even float for a bit depending on what the economic circumstances are at the time. But if I'd maxed out what we could have in theory borrowed, we would be sunk.

surfisup1000

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#3027456 26-Jan-2023 12:34

nzkc:

There's a lot of info that is not in that article that would be relevant to the banks decision. What is their level of income? How much savings did they have? What other assets do they have (maybe they have properties elsewhere)? What other purchases, particularly loan bearing ones, have they made? Why didnt they take out a longer (5yr) term loan especially if they are now campaigning for 30yr mortgages like the US (FWIW I think we should have options for longer term loans)

For the savings, there'd be an easy assumption based on the loan amount and property price. Might not be that figure of approx $200K at all though.

I have mixed feelings about the current situation and people like this couple are now in. Its really tough for them and I feel for them. I also see there being some sense of responsibility and sense on their part needed to work out "what level of interest can we afford". Because historically our rates have been far higher than when they borrowed.

It does raise questions, given the couple's only apparent option is to sell their home. So, none of those mitigating factors you mention appear to be in place.

The most likely variable that can change here is their income, maybe it has taken a dive. I'd like to see the stress test inputs and what has changed since then.

Selling is not a great idea, as it will quite possibly put them into negative equity. They could easily lose $100k or more.

With interest rates very likely to rise at least another 50 points, they're in a seriously scary situation.

I've been saying house prices have been overpriced since 2005'ish. But, with 16 years of falling interest rates and strong immigration I was quite wrong.

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#3027464 26-Jan-2023 12:47

surfisup1000: I've been saying house prices have been overpriced since 2005'ish. But, with 16 years of falling interest rates and strong immigration I was quite wrong.

Yeah, I thought the same, complete forgot about the strong immigration.

My folks were offered outrageous mortgage loans a years ago as well. and the recent law changes have probably made it better.. even though the govt was criticised for it.

The govt/banks could fix this by saying when you start a new loan, you must start repaying at the stress level amount.
But if interest rates increase, your repayments don't increase until the interest rate exceed the initial stress level.
This has multiple benefits

makes sure you can really afford the loan
allows you to initially at least pay off quicker
ensures bank has safe loan
your loan has reduced faster, as such when interest rates increase, the burdon is less

eg if I wanted a $1m mortgage, and current rate was 2.9% and stress level was 6.9%

the 2.9% level would be $4163/month
the 6.9% level would be $6586/month

cddt

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#3027499 26-Jan-2023 13:20

We've worked off the principle of only borrowing what we can afford on one income. Has served us well so far, let us pay down our first mortgage much faster than even my most optimistic forecast.

Now we've been on one income for a couple of years and will be for at least one or two more, we are going to be borrowing close to the maximum the bank will lend us (at current stress test rates) in order to upgrade from a "starter home" to a "family home". The plan however is for us to be back at two incomes in a couple of years, at which point we can double our repayments again.

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#3027516 26-Jan-2023 14:17

We just bought our first house in December at half of what this couple paid. Wife doesn't work and have 2 kids, low equity loan and although we could afford more we went for less due to rates uncertainty. Locked in for 2 years and will most likely get a rates decrease at that stage as planned.

With the savings we improving the house and paying the mortgage of quicker.

Agree with a lot of sentiment in the above comments, if you willing to commit to such a high amount, one must do their research and stress against the last 10 years, not just what it is now. Unfortunately lots of people jump in to quickly and hell our plan might fall flat as well....none of has a crystal ball

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Eitsop

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#3027540 26-Jan-2023 14:56

Seems the people are looking for help from Govt or Bank for their problem? or Journalist is simply promoting concerns of the day, without thorough analysis.

While, they should have taken some personal responsibility. I still think the bank has failed them, as they are wanting to loan money ahead of customer risks.

What I would like the journalist to do is interview the bank.

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#3027543 26-Jan-2023 15:01

Banks want to make profit so...

larknz

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#3027550 26-Jan-2023 15:25

It's not long ago banks were being criticized for being to tough with their stress testing. Now they are being criticized for not being tough enough.

mudguard

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#3027551 26-Jan-2023 15:27

Eitsop:

I still think the bank has failed them, as they are wanting to loan money ahead of customer risks.

I guess the question is, what is your solution? Historically interest rates have averaged 8%. So will that be the basis for all future lending? As I said earlier, we aren't being given all the numbers, maybe their work hours dropped, maybe it's just the increase in rates. Do you assess all loan's ability to be serviced on one income only in case of redundancy, pregnancy, ill health etc?

Obviously $1,000,000 is huge amount of money, especially in Nelson where the population is ageing and I can't imagine the incomes are as high as other main centres. Who knows, I have friends who have taken two "Auckland" salaries to the regions and bought a very large house. But what does that do for locals?

I'm not trying to defend the banks, and in the past two years they have made things more difficult for first home buyers. But don't think they haven't pored over at least three months bank statements for every loan.

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#3027571 26-Jan-2023 16:21

larknz: It's not long ago banks were being criticized for being to tough with their stress testing. Now they are being criticized for not being tough enough.

Exactly. Two years ago Stuff/Herald went and found young couples that had been saving hard but couldn't get into their first home. Now they're tracking down young couples that did get into their first home and now don't like how it's going. Of course two years ago there were loads of people who did get into their first home - but that didn't make the front page (or any page). Similarly, there are now loads of people for which first home ownership is going well, even considering the raised interest costs. Again they don't make the front page.

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#3027578 26-Jan-2023 17:06

i don't have a lot of sympathy for a lot of these stories. in most cases they got themselves into trouble. there was another one a few days ago, that looks like they made no effort to get the mortgage down as fast as they could, now the interest rates comes back to normal and they are squeezed.

i also wonder if part of this is that most people do fixed loans these days. one trap is you get a bit complacent. the mortgage repayment is a fixed amount so you spend everything else on you. with variable rates your aware that it could go up at any time, so you tend to spend fixed amount on you and everything else is spent on the mortgage. also have people forgotten that its compounding interest? the best way is to hit it hard as possible as early as possible. some really tough years at the start makes the rest a lot easier.

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#3027637 26-Jan-2023 18:28

surfisup1000:

I've been saying house prices have been overpriced since 2005'ish. But, with 16 years of falling interest rates and strong immigration I was quite wrong.

House prices have been tied to what mortgage people have been able to afford to service. So people have been looking at the monthly repayment amount, rather than the actual purchase price. So with dropping rates during 2020-21, house prices went made, and people went on a spending spree. There was also talk of interest rates going negative. This is just the start of all the pain, as many people have yet to refix at these new higher rates. It is interesting in Australia, as they have had a lot of building companies collapsing at the moment, which isn't really happening here.

I just don't know why the stress tests also got lowered to the 6's when the RB dropped interest rates, as I would have though 8-9% is more of a likely normal future interest rate. But historically interest rates are still very low. Just that house prices IMO are far too high.

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#3027641 26-Jan-2023 18:34

Earbanean:

larknz: It's not long ago banks were being criticized for being to tough with their stress testing. Now they are being criticized for not being tough enough.

Exactly. Two years ago Stuff/Herald went and found young couples that had been saving hard but couldn't get into their first home. Now they're tracking down young couples that did get into their first home and now don't like how it's going. Of course two years ago there were loads of people who did get into their first home - but that didn't make the front page (or any page). Similarly, there are now loads of people for which first home ownership is going well, even considering the raised interest costs. Again they don't make the front page.

A lot of those stories were driving FOMO. Eg if you don't buy now you will never get into the market. Yet prices have now fallen a lot in many places.

I remember the quote that NZs economy is a housing market with little bits tacked on. So we have the idea that over the long term house prices always go up in price. So people expect to always sell a house for more than they purchased it do. Although there are many houses that are currently selling for less than they were purchased for in 2020/21

mattwnz

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#3027643 26-Jan-2023 18:35

larknz: It's not long ago banks were being criticized for being to tough with their stress testing. Now they are being criticized for not being tough enough.

I think you are referring to some new regulations which made it more difficult for banks to lend. So they had to be more responsible with their lending. So banks were checking peoples spending with a microscope. I understand this was loosened up.

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