ASX banks including Australia and New Zealand Banking Group (ASX: ANZ), Macquarie Group Ltd (ASX: MQG) and Suncorp Group Ltd (ASX: SUN) are about to make things even tougher for potential borrowers.
The AFR is reporting that ANZ is going to use an assessment rate for credit cards of more than 25% higher than the normal benchmark, whilst Macquarie and Suncorp will be looking closely at credit card spending, personal loans, overdrafts, PayPal and other types of loans.
The major banks have been criticised for assessing the ability of borrowers to repay their loans by using the HEM benchmark which is only meant to show a basic level of household expenditure.
However, banks like Westpac Banking Corp (ASX: WBC) were found to have been perhaps too reliant on it and not actually digging into people's finances.
If I were giving out hundreds of thousands of dollars I'd want to make sure that the person I'm giving the loan to would be able to repay it!
People should only be given a loan they can actually realistically repay. It's important for households to know their budgets and know if they can afford the repayments, but banks need to be prudent by assuming interest rates won't always be this low and assess a borrower's whole financial picture.
I don't think it's a bad thing the banks are wanting more information. If you're looking at someone's finances you need the entire picture including credit card spending, PayPal spending, Afterpay spending and so on.
The credit check damage to the housing market is being caused because all of the loans given between 2012 and 2017 should also have received the same level of scrutiny. It's the change to proper checks that's causing the issues, not the checks themselves. Could the average Sydney household really afford a $1 million house? Likely not.
Foolish takeaway
If I were a shareholder of a bank which is improving borrower scrutiny I'd be pleased with this news, but I'd question why this hasn't been standard practice for years already. One explanation could be because of new credit report sharing of loans between banks.
Some of the big banks like National Australia Bank Ltd (ASX: NAB) and Westpac are offering grossed-up dividend yields of more than 10%. Whilst this is very attractive, I think there are better options out there for total returns because the bank dividends may not be safe.
Instead of ANZ, I think that ASX shares exposed to foreign earnings growth are more attractive options.
