In the space of six months, just about everything anyone thought they knew about the Australian home loan market has changed. Mortgage rates no longer track the official rate set by the central bank; borrowers must jump through hoops rather than fend off overzealous lenders; instead of racing to beat rising house prices, prudent buyers must factor in the possibility of stagnant or even falling values.

Previous assumptions about where the best home loan deals lie need to be examined, then re-examined. Many borrowers spurned non-bank lenders last year, for instance, only to be socked by higher rates from the big banks this year.

Resi Mortgage Corporation's head of consumer advocacy, Lisa Montgomery, says the result is that people are confused and suffering from inertia when it comes to their home loans.

"A lot of people have lost confidence in all lenders. They're not sure what they should do," Montgomery says.

So, let's look at some of the big questions facing borrowers in this changed landscape.

How tight are loans/

Lenders usually don't announce the fact that they're tightening their lending criteria but analysts are unanimous in saying that this is happening.

"We are definitely seeing lenders tightening up their lending standards and lending criteria," says Mark Hewitt, the general manager of sales and operations with Australian Finance Group, which describes itself as Australia's largest mortgage broker.

"In the credit crunch, with the difficulty of raising money, lenders are looking for assets to be much cleaner."

That said, Paul Dowling, the principal analyst with banking research firm East & Partners, says talk of "credit rationing" is overstating things.

"There's a general move towards more conservative lending but I wouldn't quite describe it as credit rationing," he says.

"The banks have money to lend - it's a question of the [borrower's] credit profile and the [profit] margin."

Observers say all lenders are tidying up their credit processes to varying degrees, with the most marked changes coming from smaller lenders, which now have difficulty raising funds on wholesale markets at a reasonable price due to the global credit crunch.

Among the changes, maximum loan-to-valuation ratios are coming down. In other words, people must now stump up a bigger deposit - harking back to the days when the rule of thumb was that potential borrowers had to turn up with a 20 per cent deposit.

Broker group Mortgage Choice says Adelaide Bank, for instance, now requires borrowers to have 10 to 20 per cent of the value of the property as a deposit when they apply for an interest-only loan. Previously the bank would have lent 95 to 100 per cent of the value.

Newcastle Permanent has changed its servicing ratio and borrowers must now have a greater disposable income after loan repayments and other commitments, the broker says.

So-called 105 per cent loans - where you can borrow more than the value of a property - are falling away as well, says Warren O'Rourke, the national corporate affairs manager for Mortgage Choice.

With line-of-credit loans, where you can dip into the equity in your home for other spending, rates in some cases have moved by a greater amount than for the lender's standard variable loan.

"A number of lenders weren't necessarily pricing for risk on low-doc loans or line-of-credit loans," O'Rourke says. "Traditionally there was a premium over standard variable rates but that gradually disappeared in the face of competition. Now they're starting to rejig them."

Dowling says there's been a "significant" drop-off in low-doc loans, which relieve borrowers of the burden of proving their income.

O'Rourke says the bigger lenders are just "tinkering" with their criteria. "In some cases LVRs have changed but [only] on specific product types."

Denis Orrock, the general manager of researcher InfoChoice, says lenders are looking more closely at borrowers and at property valuations, "particularly for certain property types and in certain areas".

In July last year Money ran some numbers through online borrowing calculators to see how much lenders were prepared to put on the table for a hypothetical household. At that time, ANZ's calculator indicated the bank might offer a loan requiring 46.3 per cent of the household's gross income for repayments.

In a recent repeat of the exercise, ANZ remained the most generous lender but the result came to 41.7 per cent of gross income. An ANZ representative was unavailable to comment.

BankWest's result dropped from 43.7 per cent to 39.2 per cent. Its head of mortgages and savings, Paul Vivian, says the Perth lender, owned by British bank HBOS, regularly reviews its criteria. "We're undergoing one of those reviews right now - they're just regular reviews and there's nothing unusual in that," Vivian says. "But it would be fair to say that, across the industry, there will be a review of credit practices, if not wholesale changes."

Interest rates

Everyone sighed with relief at the Reserve Bank's decision last week to leave the official cash rate at 7.25 per cent and normally that would be good news for borrowers. However, lenders have shown in recent months - and weeks - that they're prepared to lift rates independently of the central bank.

Home loan rates are now determined by the cost of raising funds on the global credit markets, where money has become much more expensive since dodgy US housing loans were bundled up and sold to investors.

"The connection between the Reserve's official cash rate and the cost of funding for the banks hasn't quite broken but is almost broken," Dowling says.

Even if the Reserve Bank remains on hold, market rates may still move higher. What's worse, there's no guarantee that once the cycle turns and the Reserve starts to cut rates that lenders will follow.

In Britain, a recent Bank of England rate cut wasn't passed on uniformly, with new borrowers and those coming off fixed-rate loans reported to have missed out on the savings. Asked what would happen here in the event of an official rate cut, Steve Blinkhorn, the head of home loans for St George Bank, says in the past the bank has been quick to pass on any rate cuts. He says, though, that can't be guaranteed "in the current environment".

Dowling says the main hope for borrowers is the banks' "manic obsession with market share", which should cap potential rate increases as they fight over customers.

BankWest's Vivian says moving independently of the Reserve "is a very difficult decision, and we spend an awful lot of time debating how much you move while trying to balance the impact on customers. All of the banks have been forced to move more than we would like."

Bank or non-bank

Non-bank lenders were the first to feel the impact of the global credit crunch - and to pass on those costs - because they rely on wholesale markets to raise money to fund their lending operations.

In contrast, Australian banks use their depositors' money to finance a large chunk of their lending - about half of lending for the big banks and about a third in the case of regional banks, Dowling says - so they're not as exposed to rising rates on global credit markets.

The result was that in the second half of last year many borrowers backed away from non-bank lenders, seeking what they thought would be safe haven with the banks.

Orrock says it's a mistake to assume that bigger is better. Indeed, the table shows that credit unions and non-bank lenders have many of the best deals (see table on opposite page).

"If you did refinance from a non-bank into one of the banks before January, when the banks also started increasing rates, you'd be feeling cheesed off at the moment," he says.

The state of play is that banks and non-banks have "topped up" the Reserve Bank's official cash rate rises by roughly the same amount.

The Reserve has lifted the official cash rate one percentage point since August, while the big banks and non-bank lenders have moved about 1.4 percentage points.

Credit unions and building societies, which have the benefit of being at least partly funded by household deposits, have managed to undercut them, however. Umbrella group Abacus-Australian Mutuals says that, on average, mutuals' home loan rates are about 0.2 percentage points behind those of the banks.

"There's some excellent value - a number of credit unions and building societies haven't passed on rises and, where they have, in general they've been much slower to pass higher costs on," says Abacus's chief executive, Louise Petschler.

However, she acknowledges there's a limit to the capacity of some mutuals to meet any surge of interest from borrowers looking for bargain rates.

"For some, it's a good opportunity - they're liquid, they're ready to roll," she says. For others, it will be a case of managing growth carefully.

Some mutuals are open only to members of certain occupations and are not included in the table.

House prices

In the past borrowers felt compelled to race against rising house prices - borrowing to the hilt to get into the market before prices left them behind.

Some borrowed on the basis that capital growth would leave them debt-free when they sold.

But those assumptions may have to change, too.

UBS's chief economist, Scott Haslem, says most indicators point to economic growth - and jobs growth - slowing in Australia.

"It seems to us that 15 per cent growth in house prices year on year is unsustainable," he says. "You're looking at flat to minus 5 per cent as a realistic range."

In 2004, house price growth went from 20 per cent to zero in the space of a year, he says. "Our expectation is for a similar effect this time."

Morgan Stanley market strategist Gerard Minack thinks prices could fall by 10 per cent in the next two to three years if there's a soft landing for the economy but by as much as 25 to 30 per cent if we fall hard.

The International Monetary Fund recently said Australian property was among the most overvalued in the world and that at least 25 per cent of the increase in value over the past decade couldn't be justified by fundamentals.

The Housing Industry Association, however, has dismissed talk of widespread price falls as "way off the mark".

Last week's Bureau of Statistics data showed a 1.1 per cent rise in house prices nationally in the March quarter, or 13.8 per cent over the year. However, Commonwealth Bank economists say the data masks "significantly divergent trends" in the capital cities.

"Higher interest rates are likely to suppress demand for house purchases in a national sense but there are still likely to be significant differences in demand conditions prevailing in the next five years," they say in an analysis of the data. "The mining-related capital cities such as Perth, Brisbane, Darwin and now Adelaide, with stronger population, jobs and income growth, are likely to have relatively larger house price rises."

Be prepared

Tighter lending standards mean that people must have their finances in good shape before they approach a lender.

Resi's head of consumer advocacy, Lisa Montgomery, says a clean credit profile can mean access to a wider range of loans - potentially at better rates - and quicker approval.

"A borrower's credit rating is one of the most important criteria lenders look at, along with the loan-to-value ratio and the borrower's ability to service the loan," she says.

The way you've managed all your past and present credit arrangements - such as credit cards, mobile phone accounts and retailers' interest-free packages - will count for a lot.

"By reviewing your credit profile before applying for a loan, you can identify any issues that may be of concern to lenders and look to clean up any outstanding financial arrangements," she says.

Resi suggests taking these steps:

Review your credit reference. This includes information such as inquiries about you by lenders, any credit card defaults and bankruptcies. You can check your credit reference at http://www.mycreditfile.com.au.

Consider reducing the number of cards you have or your spending limits. Lenders look at the amount of credit you have access to, not just what you owe. Cut up cards or reduce the limits and you may be eligible for a bigger home loan.

Don't leave bills in arrears. Even telephone bills can appear on credit reports - nothing's too small and everything counts. Even if a loan or account is no longer current, past credit problems can still show up.

Explain any arrears or defaults to your lender upfront. It's better to reveal any past or present credit problems to your lender yourself at the time of application, rather than have them discovered later.

Avoid multiple applications for credit. A credit report shows applications for credit, not just those approved, and multiple inquiries can ring alarm bells with lenders. Apply for credit only once you've carried out your initial research.