By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
There have been plenty of headlines over the last few weeks about new lending restrictions and what they mean. Here’s an explainer about why the Australian Prudential Regulation Authority (APRA) has announced these changes, when they take effect, and most importantly – how they impact you.
What are the latest APRA changes?
From November 2021, borrowers will need to be able to prove they can make repayments at least 3% higher than their actual loan rate, in order to receive a loan. This is a form of “stress testing” to make sure you can afford your mortgage repayments, if and when interest rates rise.
Banks have always applied a buffer, but in the past the serviceability buffer was an extra 2.5%. Now, it’s 3%.
So if you apply for a mortgage with an interest rate of 2.2%, the bank must now assess that you will still be able to make repayments if the rate rises to 5.2%, up from 4.7%.
Interestingly, the new 3% buffer rate does not apply to non-bank lenders, though APRA is considering including them later this year.
What impact does this have on your home loan borrowing?
According to APRA, the changes mean the maximum borrowing capacity for the average borrower will reduce by around 5%.
If you were previously approved to borrow $1m, for instance, this could reduce your borrowing power to $950,000.
This has the potential to have a significant potential impact on your borrowing capacity, and some would-be homeowners are worried about the impact of these changes, which kick in for all applications lodged from November 1 on wards.
The important thing to keep in mind is that every bank and lender will assess your loan differently. Just because these changes have been rolled out by APRA, it doesn’t necessarily mean you won’t be able to get the loan you want.
I had a client recently who wanted to refinance from $700,000 to $800,000, with a plan to use the equity for renovations. Her home has increased in value during the last 12 months (up from $900k to $1.2m) so she has plenty of equity.
But with the big 4 banks, she didn’t service. The loan would be declined if she applied. So, we looked at a number of other banks and online lenders. She serviced with a number of them, and ended up getting a cashback rebate of $3000, plus a lower interest rate, and access to the equity she wanted for renovations.
This is the power of working with a mortgage broker. We can shop around and help you find the best option on the market to suit your needs.
Why has APRA made these changes?
Truth be told, it was inevitable that APRA was going to take some sort of action at some point.
Australian property prices have soared over the last 12 months, growing between 10% and 40%, depending on the property type, condition, and location. With interest rates of around 2%, it’s never been cheaper to have a mortgage and interest rates look set to stay low for several years.
All of this means APRA needed to step in and put a lid on that growth somehow, so it doesn’t continue to balloon and turn into an overpriced property bubble. The last thing our economy needs is a property market collapse. Property drives a huge portion of our economy and state budgets, so it would be detrimental if we went in that direction.
Has APRA done this before?
Yes, although they took a different approach.
The last time APRA took action on home loans a few years ago, they made changes to investor loans only: they introduced a rule that limited the amount of investor loans banks were allowed to have on their books, and as a result of those specific measures, investor loan interest rates increased.
In fact, an investor loan at the time was around 1% higher than an owner occupier loan. Today, both investor and owner occupier loans are almost the same.
When these rules were introduced by APRA it had an almost immediate impact on the volume and price of credit in the loan market, and it helped to curb the massive property price growth that was happening at the time. So, it’s expected that this latest move by APRA will take some heat out of the property market, too.
If you’re keen to buy a home or refinance your loan and you’re worried about the impact these APRA changes might have on your situation, my suggestion is to contact a broker. Broker can help you problem-solve and find a way forward if your bank says no, and best of all, most brokers services are free.
Louisa Sanghera - Director and Principal Award-Winning mortgage broker at Zippy Financial
Louisa created Zippy Financial after a 25-year career in banking, with the goal of using her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients grow their wealth through smart property financing. Whether you are looking to buy your first home, re-finance or build your property investment portfolio, Louisa and her team of experienced brokers can help guide you through the challenging maze of finding & securing exactly the right loan for you.
M: 0414083522 or 1300 855 022
E: louisa@zippyfinancial.com.au
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