Interest rates are low. House prices are soaring. So why did APRA make changes to lending rules now? And who is likely to be affected?
The Australian Prudential Regulation Authority (APRA) recently wrote to banks advising they must increase their buffer rate on home loans from 2.5 to 3 percentage points. And they only have until October 31 to comply.
With interest rates remaining at record lows and house prices soaring, you might ask why APRA decided to make it harder for people to borrow money and why are they doing this now.
It can be frustrating to navigate the changes and require considerable effort to make sense of what has changed. We’ve done the hard work for you to share what the APRA lending rules changes are and what it means for you.
APRA is our banking watchdog and one of their responsibilities is to ensure banks and other lenders aren’t lending to people who can’t afford to repay loans. In other words, APRA makes responsible lending rules and expects the banks to uphold. Well it’s not so much an expectation, it’s a rule. Banks must maintain APRA lending standards.
Currently when a lender is assessing a potential home borrower’s ‘serviceability’, they need to include a buffer of 2.5 percentage points. Effective immediately, this rate has increased to 3 percentage points.
This means banks and other lenders can’t lend to someone who wouldn’t be able to repay their loan if it were 3 percent higher than the interest rate they’re being offered.
Should any lenders fail to implement these changes, they’ll be financially penalised.
This is why seeking out the assistance of an experienced mortgage broker is becoming increasingly important for both first home buyers and investors. Because we are on top of changing lender requirements, and know which lenders will have a buffer rate that can work in with your budget and serviceability requirements, It’s our job as a broker to do the legwork, so you don’t have to.
Book your free 15 minute discovery call to chat about your lending needs and how we can help.
With house prices being pushed further out of reach for many new home buyers, that’s not the main reason APRA has acted now. Soaring property prices and low interest rates have seen borrowers place themselves into high pressure financial situations, increasing their household debt.
APRA Chair Wayne Byres said, ‘More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.’
A highly indebted borrower risks both their financial future and stability. Should their income reduce, expenses increase or interest rates rise, even slightly, these borrowers can quickly find themselves on very shaky ground. People with high debt loads are also more likely to spend less should any changes occur. This reduced spending across the board can intensify the impact of an economic slump.
For the last few quarters, APRA has noticed a trend towards lending to more marginally and highly indebted borrowers. For example, in the June 2021 quarter, ‘more than 20 percent of ADIs’ new lending was to borrowers that had borrowed more than 6 times their pre-tax income.’ This is high by both historical and international standards and, without their intervention, was likely to increase further.
With the pandemic, rolling lockdowns across much of the country and borrowers under economic stress, both APRA and the Council of Financial Regulators (CFR), which includes the Reserve Bank of Australia (RBA), the Treasury and the Australian Securities and Investments Commission (ASIC), were reluctant to make any changes. But with lockdowns ending and the Australian economy expected to bounce back well, now was the right time to act.
My Byres added, ‘In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future.’
From November 1, all new borrowers applying for a home loan will be assessed at the new rate. However, the impact of these changes is likely to be felt by investors more than owner-occupiers.
Investors tend to buy at higher levels of leverage (that is, they’re using debt to finance assets) and might have other debt, which will also need to pass the new serviceability buffer.
By seeking out the experience of a mortgage broker who is aware of the different lender’s serviceability requirements, you can be directed to the most suitable investment loan option for you. Because what is important to remember with this APRA change, is that when you are being assessed for a new investment loan your existing liabilities if you have other loans elsewhere, will also be subject to the new APRA requirements.
So discussing your particular circumstances with a broker can help you to get a good understanding of your serviceability before applying to a lender.
In contrast, new home buyers are often limited as to the amount they can borrow by the size of their home loan deposit. But we know as brokers, that the maximum amount you can borrow does differ across different lenders. So we are able to provide personalised service, with a tailored approach to match you with the best loan product.
APRA suggests ‘the serviceability buffer will reduce maximum borrowing capacity for the typical borrower by around 5 percent.’ and ‘will not have any impact on mortgage interest rates.’
They add that ‘the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest.’
In making these changes to mortgage lending standards, APRA isn’t trying to affect housing prices. Rather, they’re ensuring lenders maintain prudent lending standards with their borrowers fully able to service their debts, even with changes to the current financial circumstances.
Are you a first home buyer concerned about these changes? We’re happy to (virtually) sit down and discuss this with you.