It’s not exactly news the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have been carefully monitoring trends in housing borrowing.
Now, after a 20 per cent surge in property prices in the last 12 months across the country, APRA has decided to step in to try to slow rising prices by tightening credit conditions.
What does that mean for home loan applicants?
From November 1, there will be tougher tests for home loans. For example, banks will have to check if new borrowers will be able to afford repayments at three percentage points above their current rate.
For example, if you apply for a home loan with an interest rate of 2 per cent after November 1, the lender will have to evaluate if you will be able to afford to make repayments with a 5 per cent interest rate. Currently, this buffer is 2.5 per cent.
Although the regulator estimates that the new rule will reduce borrowing capacity by around 5 per cent, it’s not all doom and gloom.
Not all borrowers will be affected by the small rule change, but more so the ones borrowing at high LVRs (loan-to-value ratios) and high DTIs (debt-to-income).
‘A lot of borrowers don’t borrow at their full capacity, so the changes might not affect them. Only 8 per cent of our home loan customers borrow the maximum amount’ declared the nation’s biggest lender, Commonwealth Bank.
The RBA also warned, ‘It may take some lenders several weeks to adjust to the new settings, and some households will have already planned or committed to purchase based on previous lending policies’.
The New Zealand government adopted similar loan restrictions this year after the value of kiwi homes increased almost 30 per cent in the last year. Since October 1, the quantity of loans banks can make to owner-occupiers with less than 20% deposit has been reduced.
How much will you be able to borrow?
APRA has estimated that a typical household’s maximum borrowing capacity will decrease by 5 per cent.
That means that if the maximum someone could borrow were $600,000, under the new rules, their maximum borrowing capacity would be $570,000.
The changes aim to protect people from taking on risky levels of debt that come with huge mortgages.
Financial analysts advise households to reassess their plans if they were planning to borrow the maximum amount.
Although different lenders will adjust to the new changes using different processes and timeframes, some banks have already announced that any existing pre-approvals will be honoured.
If you need help understanding how these changes will affect your loan, talk to one of the brokers today.