Rule changes make it easier for buyers
As of this week, it should be easier for Australians to borrow money to finance a home purchase.
The change comes from the Australian Prudential Regulatory Authority (APRA), who have eased existing residential lending guidance put in place back in 2014.
When people apply for finance for a home loan, lenders typically apply something called a “stress test” to see whether the applicant can weather a certain minimum interest rate increase on their home loan repayments. Since 2014 this has generally been 7 to 7.25%.
The regulator’s changes to the serviceability assessments for mortgage lending, which come into effect immediately, mean this rate can come down.
Now, lenders and authorised deposit-taking institutions (ADIs) can set a minimum interest rate floor of whatever they choose, with a revised interest rate buffer of at least 2.5% over the loan's interest rate.
The changes could make a significant impact for some families. For example, a household with an income of $100,000 may be able to borrow up to $50,000 more if their loan was assessed at 6.25% instead of 7.25%.
The shift requires banks to have more capital on hand ($50 billion in total) to manage the risks in lowering the benchmark for borrowers.
"In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards,” said APRA chairperson Wayne Barnes, explaining the changes.
“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products."
Mark Polatkesen, Director and Senior Mortgage Broker at Mortgage Domayne, Resimax Group's financial solutions partner, says the changes could see people's borrowing borrowing power improve in the range of $50,000 to $100,000, depending on their situation.
"Based on a 3.50% - 6.00% assessment rate, someone making $60,000 a year might be able to borrow up to $410,000 - $50,000 more than previously," he explained.
These figures are based on a single applicant with no dependants and no other debt.
Home loan applicants will still need to meet core lending criteria (such as a credit rating and sufficient steady income), but many should find they may now be able to unlock a loan previously denied them or borrow more capital for a dream home or investment.
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The move is another confidence boost for the housing sector and should represent greater relief for prospective buyers who feel they’ve been shut out of the market in recent years. If there is a surge from borrowers, there may be a flow on effect creating further house price rises.
Though APRA’s changes can indeed open doors, it’s critical to make a robust assessment of your financial situation before taking on additional debt (even constructive debt like a mortgage).
If you’d like to discuss how the changes affect your borrowing capacity, drop us a line.