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Banks reassess exposure to mining towns

In order to lessen the chance of borrowers defaulting on their loans, Australia’s major banks are reassessing their exposure to risky mining towns as rental yields in some areas have become “not sustainable”.

During the height of the resources boom, demand for home loans and rental properties was enormous, however, as construction spending declines and the miners become more cost-effective with less working capital, that demand for accommodation drops making yields unsustainable.

Coming at a time where the banks have been under pressure from the Australian Prudential Regulation Authority and the Reserve Bank of Australia to not relax their lending standards as competition in the market heats up, Commonwealth Bank (ASX: CBA) and ANZ (ASX: ANZ) have both curbed riskier lending in areas that are heavily reliant on the resources industry.

As reported by The Sydney Morning Herald, Commonwealth Bank will now cap at 8% the rental yield that it factors in for new property investment loans in these higher risk areas. ANZ has also added a number of areas in Queensland to the list of higher-risk postcodes. Meanwhile, Westpac (ASX: WBC) also maintains a policy whereby it limits low-deposit loans in “single-industry towns” to lessen its exposure whilst NAB (ASX: NAB) doesn’t have a formal policy on the issue.

Areas on the list, which are all located in either Queensland or Western Australia, face an 80% cap on loan-to-valuation ratios for new loans to property investors.

Foolish takeaway

Whilst an “extra level of caution” is being taken, an ANZ spokesman, Stephen Ries, stated that “We are continuing to lend in these towns and since this policy was introduced in January the majority of applications have been approved.”

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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