If you’re considering buying a property in 2023, it’s crucial to understand the current landscape of the property market and housing borrowing.
It’s not exactly news the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have been keeping a close eye on the property market and housing borrowing.
In 2021, after a surge in property prices across the country, the APRA decided to raise the serviceability requirement for new borrowers from 2.5 to 3.0 percentage points. Essentially, that meant that lenders had to assess whether borrowers could afford to make repayments on their home loan at an interest rate 3% higher than the lender’s rate.
Fast forward to 2023, and interest rates have risen beyond the 3% buffer recommended by APRA. With the cash rate increasing sharply and lenders lifting their interest rates to over 5%, many borrowers are now being assessed at a serviceability rate of over 8%.
The latest Quarterly ADI statistics report from APRA also revealed that banks and lenders are becoming more cautious, with the proportion of loans granted with a loan-to-valuation ratio of 90% or higher dropping to a new all-time low of 5.9%.
This trend is impacting high-risk borrowers who may struggle to meet their repayment obligations. Tighter serviceability requirements and higher borrowing costs are making it harder for some Australians to enter the property market or refinance high-LVR existing loans.
Scenario
Suppose you’re applying for a loan of $550,000 with an average variable interest rate of 5.48%. According to the current serviceability requirements, your lender will need to evaluate your ability to make repayments at an interest rate of 3% higher than their rate. This means that your lender will need to see that you can meet repayments of around $4,222, while your actual repayments would be $3,116 per month.
No changes in sight
Despite continued inflation and multiple cash rate hikes by the RBA, the APRA has announced that they do not plan to make any changes to their macroprudential policy measures yet. This means that if you’re planning to apply for a loan in 2023, you will still be subject to the 3% buffer on top of the lender’s interest rate.
So, what can you do to improve your serviceability? Here are a few tips:
- Minimise unnecessary credit as this is counted as a liability when assessing your serviceability.
- Consolidate unsecured debts so that more of your income is available to make regular repayments on your home loan.
- Cut back on discretionary spending as this can be grouped under living expenses, which can affect your borrowing capacity.
- Increase the size of your deposit (savings or equity) to ramp up your serviceability.
At UFinancial, we can help you to work out your total borrowing capacity, identify lenders that will consider your application, and find the right loan for your individual circumstances. Book a free chat today.
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