In October 2021, banking regulator APRA (Australian Prudential Regulation Authority) announced a tightening of its serviceability tests for home loans.
The minimum interest rate buffer on home loan applications has been increased from 2.5% to 3%. The result is that obtaining a mortgage will become more difficult for some borrowers, with the maximum borrowing capacity for most prospective mortgagees reducing by 5%.
This move comes in response to APRA’s concerns that too many new mortgage holders (one in five) have borrowed more than six times their pre-tax income in the last few years. This is both a driver of and due to residential real estate values in many areas skyrocketing by more than 20% in the previous year (and minimizing affordability for many people), despite the COVID-19 pandemic, as well as historically low-interest rates.
The regulator is increasingly concerned about the ability of mortgage holders to repay their loans if and when interest rates rise over the life of the loan. This represents unprecedented inherent credit risks for many borrowers who have extended themselves to the hilt.
The announcement came on the back of interest rate rises by the Reserve Bank of New Zealand and similar moves in Norway and South Korea. At the current rate of debt, some borrowers will struggle to maintain their repayments. As the world recovers from the lows of the pandemic, interest rates are bound to rise globally.
What Does This Mean for Borrowers?
Banks and other lending institutions must apply stricter guidelines to test borrowers’ ability to repay their mortgages. APRA has stated that all lenders (authorized deposit-taking institutions) must now operate with a buffer of at least three percentage points above the current loan interest rate.
This buffer is deemed an essential contingency plan to accommodate interest rate rises and unforeseen changes of circumstance that may inhibit a borrower’s ability to maintain minimum repayments.
From November 2021, banks must test and ensure any new borrower can afford their proposed mortgage repayments if interest rates rise 3% above their current rate. Those deemed unable to service such an increase will see their loan applications denied.
APRA anticipates these new regulations will impact investors much more than first-home buyers, who tend to borrow more at higher leverage levels. The buffer will also be applied to their existing debts.
Don’t Panic!
While it may sound scary for borrowers, this move by APRA is not all doom and gloom. Consider that before COVID-19 hit in early 2020, the assessment rate was close to 4% over the advertised rate. The abovementioned changes take the assessment rate to 3% – so borrowers are still in a better position than pre-COVID.
Work With an Experienced Mortgage Advisor
The home of your dreams need not be a pipe dream. Work with a reputable local mortgage advisor to access the best current home loan advice and application outcomes. An experienced mortgage broker has the expertise, insight, and industry connections to understand your home ownership or investment goals and your borrowing capacity and pair you with suitable home loan product options from a vast pool of traditional and non-traditional lenders.
