Credit Ombudsman cautions borrowers and lenders on low interest rates

The Credit Ombudsman, Mr Raj Venga, has warned that new home buyers may be stretching themselves too far in the pursuit of their dream home.

“Interest rates at record lows are reported to have fuelled a surge in house prices. New home buyers and investors seem to be caught up in a housing frenzy which has already pushed Sydney’s auction clearance rates to record highs. Australians are borrowing more to purchase properties”, observed Mr Venga.

“Most lenders tightened their lending criteria after the GFC, but there is now an increasing number of loans available to home buyers with a small deposit, some as low as 5%. Borrowers may be left with loans they cannot afford when the record low interest rates start to rise, as they inevitably will. As it is, one third of the complaints we receive are about mortgage stress and financial hardship”, warned Mr Venga.

Mr Venga observed that the rate of growth in New Zealand house prices had prompted the New Zealand Reserve Bank to impose restrictions on the loan-to-value ratio of housing loans.

“Whether or not this is or should be introduced in Australia, we expect lenders to maintain prudent lending practices and adhere to their responsible lending obligations under the law. In an environment of historically low interest rates, lenders should consider whether they are using appropriate interest rate buffers and margins on living expenses when assessing serviceability, Mr Venga said.

From the Credit Ombudsman Service Limited.