Borrowers are starting to let go of their credit cards to make enough room for their budgets to afford mortgage repayments, according to Equifax.

According to findings from the credit reporting agency, borrowers have taken steps to improve their financial situation to ensure they can service their loans.

One of the biggest moves observed during the past 18 months was cutting out credit cards, particularly among the typical first-home buyer demographic (under 30 years old).

This came as the value of new mortgages increased by 70% over the 18 months to July 2021.

On average, individual mortgage debt increased by around 2.7% or $13,100 during the same period.

At the same time, the total mortgage limits have now increased by $110bn or around 5.6%.

Equifax general manager for advisory and solutions Kevin James said this sparks a concern, given that around 190,000 first-home buyers entered the housing market.

“It’s good to see that first home buyer growth has accelerated with encouragement from government stimulus packages; still, it is worrying that mortgage limits are growing at a rate faster than most homeowners’ ability to service their loans,” Mr James said.

Nearly a quarter of newly opened mortgage applications were from first-time buyers.

Meanwhile, refinancers comprise 35% of new applications, with upgraders (26%) and borrowers getting additional funding (16%) taking the remaining share.

Mortgage limits swell across the board

Based on state data, the biggest increase in mortgage limits were recorded in Queensland (13%) and New South Wales (12%).

“Disparities in the cost of living and the housing market opportunities in each state continue to be key contributing factors that are pricing mortgage borrowers out of the market, particularly in NSW and Victoria,” Mr James said.

Meanwhile, the recent lockdowns in New South Wales and Victoria have made many borrowers not as enthusiastic as they were early this year when mortgage enquiries peaked.

“Mortgage enquiry volumes are a strong indicator of future loan take-outs, and economic developments related to the pandemic will continue to steer borrowers’ sentiment for many months to come,” Mr James said.

“We will be monitoring volumes closely as the economy reopens in states emerging from lockdowns to see how this will flow through to the mortgage market.”

Borrowers likely to face tighter lending standards

The recent move by the Australian Prudential Regulation Authority (APRA) that increased the serviceability rate lenders use to assess mortgage applications is likely to kickstart other adjustments to lending criteria.

REA Group senior economist Eleanor Creagh said further restrictions are likely to target high debt-to-income and loan-to-value ratios.

“Those limits would likely come with concessions for first-home buyers, though APRA’s upcoming information paper will shed further light,” she said.

—

Photo by Paul Felberbauer on Unsplash.