👉 Background: Westpac was established in 1817 under the name Bank of New South Wales. And of course, since then, it has grown to becomes Australia’s second largest bank.

👉 What happened: Over the last couple of years, Westpac assessed the capacity of a borrower to repay a home loan with a buffer of 2.5%-3% more than the current interest rate.

👉 What else: The problem here is that the cash rate has raced from 0.1% last May to 3.35% in February. And now $212 billion of Westpac's home loans, or 45%, will have to make repayments higher than the bank assumed.

What's the key learning?

💡 Before giving you a home loan, your bank wants to know that you will be able to cover any repayments for that loan.

• Could Jimmy manage to pay back his mortgage if the interest rate increased by 2%? What about 3%?

They like to call it a “serviceability buffer”, which tries to model the worst case scenario for the bank and customer for repayment amounts.

💡 For Westpac, many of their customers are close to reaching the ‘serviceability buffer’ projected
Meaning… Westpac’s serviceability buffer didn’t properly account for the worse case scenario at all.

💡 So the question is: Will bad debts sky rocket big time? For now, bad debts at the big banks remain very low.. But some experts are expecting tougher times in the second half of the calendar year.

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