Westpac is closing a loophole to stop property buyers using a combination of personal loans and mortgages to fully fund deposits, or top-up shortfalls if off-the-plan apartments are revalued by the bank at less than the purchase price.
It follows an internal review that concluded top-up personal loans are not "genuine savings" and "unacceptable" as a buyer's contribution to a loan application.
"We need to see more evidence of genuine savings," a bank spokesman said about the policy that will apply to new loans from Monday.
Borrowers will be prevented from evading the changes by taking out a personal loan with a competing lender.
"We check the credit history of all loan applicants so any outstanding loans or applications with other banks are discoverable," the spokesman said.
Westpac's ban is also a response to the Australian Bankers' Association's recent strategy to improve bank practices, increase transparency and strengthen culture, she said.
Lenders are under additional pressure from regulators to tighten their borrowing criteria because of concerns about rapidly rising prices in Melbourne and Sydney, falling affordability and fears that borrowers could have problems repaying jumbo loans, particularly if there is a rate rise.
Regulators, including the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, want lenders to understand their borrower's strategy for repaying the loan principal.
Measures include increased deposits, authenticating evidence of income, a record of savings and ability to service higher interest rates, particularly for interest only loans where the lender agrees to a term in which the borrower pays only the interest.
Mortgage brokers believe other lenders will clamp down on mixing personal and housing loans to help buyers bridge the deposit gap.
"This could be the beginning of the end of the 100 per cent housing loan," a veteran broker, who did not wish to be named, said.
Brokers, who arrange loans for borrowers, said dual loans are popular to help property buyers meet minimum lending criteria, particularly first-time home buyers in Melbourne and Sydney where prices are rising five times faster than the official rate of inflation. Westpac said its exposure was small but did not provide any numbers.
Westpac said in a statement to mortgage brokers that following a policy review it had decided "provisioning of a personal loan to assist with the purchase of a home loan is not aligned to our home loan genuine savings policy".
It added: "Sale of personal loans or flexi loans – which are personal overdrafts or unsecured loans – to assist with the purchase or sale of a property will no longer be available and removed from the list of a customer's contributions."
Last month, Westpac announced an 8 basis point rise in investment-only property loans from 5.6 per cent to 5.68 basis points. The rise also applies to St George, Bank of Melbourne and BankSA.
Westpac's owner-occupier, interest-only home loan also rose by 8 basis points from 5.33 per cent to 5.41 per cent. Rates on its equity access range increased by 15 basis points.
