Westpac recently announced it was closing a loophole that let property buyers use a combination of personal loans and mortgages to fully fund deposits. Closing the loophole would also stop property buyers from topping-up shortfalls if off-the-plan apartments are revalued by the banks at less than their purchase price.

The changes follow an internal review that concluded top-up personal loans were not “genuine savings” and were “unacceptable” as a prospective borrower’s contribution to a loan application.

“We need to see more evidence of genuine savings,” a Westpac spokesperson said about the new policy, which will apply to new loans starting today.

Borrowers will be prevented from evading these changes by taking out a personal loan with another lender. “We check the credit history of all loan applicants so any outstanding loans or applications with other banks are discoverable,” the spokesperson said.

Lenders are under added pressure from the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to tighten their borrowing criteria due to concerns about rapidly rising house prices in Sydney and Melbourne, decreasing housing affordability, and growing fears that borrowers may experience difficulty repaying jumbo loans, particularly if there is a rate rise.

Both ASIC and APRA want lenders to understand their borrowers’ strategy for repaying the loan principal. Measures include authenticating evidence of income, higher deposits, a record of savings, and ability to service higher interest rates (particularly for interest only loans).

Many mortgage brokers believe other lenders will soon clamp down on borrowers mixing personal and housing loans to bridge the deposit gap. Mortgage brokers said dual loans are popular because they help property buyers meet minimum lending criteria, particularly first-time home buyers in Sydney and Melbourne, where prices are rising five times faster than the official rate of inflation.

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