When applying for a home loan, banks and non-bank lenders impose variety of lending criteria and all have different policies in place that must be met before qualifying for finance. These include a stable income, proof of genuine savings, current debt, superannuation, current assets, good credit history​.

 Discounts that were otherwise applied to investment lending are being removed.

Lenders have now accepted APRA's tougher stress tests.

The regulator prefers a 7 per cent interest rate floor when deciding whether borrowers can handle future rate rises. This will caused some banks to lift their tests by a full percentage point.

"Typically you may have had a benchmark that was maybe 150 to 200 basis points above the variable home loan rate, in practical terms that means something like 6.5, 6.25 to 6.5 per cent," he said.

The big four and smaller lenders have also tightened income assessments.

That means not counting 100 per cent of rental income, dividends, bonus pay and other highly uncertain earnings.

It also means banks are now looking at borrowers' actual spending, not just using a standard poverty-line benchmark which many had used previously.

The banks are setting quite aggressive sales targets to their loans officers, often linked to bonus and incentive payments.

At present ING Direct - which already had tighter lending standards than many institutions, with a floor stress test rate of 8 per cent - made New South Wales a special case, telling brokers it would not accept investor loans for more than 80 per cent of the property's value.

Anywhere else in the country, 90 per cent is its new loan-to-value limit for property investors.

It also joined a large number of banks cutting interest rate discounts for investment loans, across the board from the vast majority of lenders, where discounts that were otherwise applied to investment lending are being removed.

"That's going to have an impact across the market."

'Risk increases' as borrowers look beyond banks

APRA only regulates authorized deposit taking institutions, such as banks, credit unions and building societies.

A raft of mortgage finance companies can largely set their own standards.

"History has shown us that when you restrict access to conventional finance and credit consumers then go and find it elsewhere, and the level of risk to them increases," he warned.

This could open up a can of worms in regards to cowboy lending companies, and possible rogue behavior within bank branches.

"Many mortgage brokers have stories where they've assessed that a loan would not be in the interests of a borrower and then they've the borrower gone down to the local branch of the bank and the bank has written the loan," he said.

The big concern is that the incentive-based model that got the big banks in trouble over dodgy financial planning also exists for home loans.

That means the culture at the coal face may not reflect the standards set at head office.

The issue they have difficulty managing is at the branch level they're setting quite aggressive sales targets to their loans officers, often linked to bonus and incentive payments, and that's where the opportunity for poor practices and over-aggressive lending can come in.

This is called low correlation – as one investment doesn’t perform, hopefully another investment in your portfolio goes up and therefore creates a balanced result for the portfolio overall.

On any day, some of your assets may win, some may lose, but overall the result should be that the portfolio rises in value in the long term.

But diversification isn’t just a protective measure; it may also allow you to generate a higher rate of return for a given level of risk.
There are several different kinds of diversification. There is diversification across asset classes – cash, fixed interest, shares and property held throughout different States as well as types of property held. 

Finally there is diversification within an asset class – as in having a diversified share portfolio of different companies and industries.
Studies have shown how you diversify your portfolio – or your asset allocation – can be one of the most important investment decisions you make.

Diversification is not simple, so we recommend you seek financial advice before making any decisions about your investments, to ensure your choices are appropriate to your personal objectives, financial situation and needs.