Home Loan Rules Tightened
If you are in the market for buying a new property, or still haven’t had a chance to refinance and take advantage of the lowest interest rates we’ve seen in our lifetime, it's a good time now to act quickly. From November 2021 it is likely that the amount you can borrow right now will be significantly reduced with changes announced by the banking regulators yesterday.
After several weeks of the bureaucrats calling out the potential risks in the housing market, APRA has just announced tougher serviceability tests for home loans, which will make it harder for some borrowers to get a mortgage.
In a letter to banks yesterday, the Australian Prudential Regulation Authority (APRA) has increased the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points. It estimates the increase will reduce "maximum borrowing capacity for the typical borrower by around 5 per cent”
What brought about this change?
Both the OECD and the International Monetary Fund (IMF) have called on Australian regulators to step in to cool the booming Sydney and Melbourne property markets by tightening lending standards for some time.
Lending is higher than last year as people exploit record low interest rates to take on large mortgages. The average loan size in NSW is $732,000. House prices are up 20.3 per cent in the last 12 months, according to financial insights firm CoreLogic. That’s the fastest pace since June 1989.
RBA has warned soaring housing debt could be a financial risk and called for new rules for highly indebted borrowers. “When prices are rising very rapidly and there are expectations that this will continue, borrowers are more likely to overstretch their financial capacity in order to purchase property,” said Assistant Governor Michelle Bullock a few weeks ago.
And last week the Council of Financial Regulators issued a statement stating “The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound.”
This was followed by Treasurer Josh Frydenberg saying “We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system”.
Many analysts had expected a move to tighten home loan requirements after recent comments from regulators and the Treasurer, however most did not expect the change to happen so quickly.
What will happen?
This means that from November 2021, banks will have to test whether new borrowers can still afford their mortgage repayments if home loan interest rates rose by 3 percentage points above their current rate. This move should not have any impact on mortgage interest rates but on the maximum loan they can borrow.
In other words, if you applied for a mortgage with an interest rate of 2.5 percent on November 1, the bank would be testing to see if you can afford to make repayments with a 5.5 percent interest rate. If you could not, the loan application would be denied.
If the banks do not use this higher test, they will be financially penalised by having to hold more reserves against losses, which would reduce their profitability.
Therefore, it is safe to say, all regulated institutions will use the minimum 3 percentage-point buffer come November.
For home loan applicants, the maximum loan they can borrow based on their income and expenses is expected to be around 5% lower than it was under the current serviceability test of 2.5 per cent.
What’s next?
Many analysts had expected a move to tighten home loan requirements after recent comments from regulators and the Treasurer, but most did not expect the change to happen so quickly, given the impact of lockdowns and the uncertain economic recovery.
APRA has the capacity to impose so-called macro-prudential rules on banks, such as imposing limits on particular types of lending or tightening income-to-loan ratios.
APRA has decided not to implement debt-to-income limits for now - which were being speculated as a potential move - saying these would be “operationally complex to deploy consistently” and could have resulted in higher interest rates for some borrowers because lenders would have lifted rates to ration credit to get under the limits.
This led some banks to suggest more macro-prudential intervention would follow down the track, while APRA said it “does not rule out that the other measures might be used in the future”.
If you’re looking to take up a new loan or even refinance, act fast as your borrowing power will reduce come November. Give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.
