APRA changes to home loans explained

Banks have been given new borrowing rule which could have some impact on the real estate market.  The regulator, Australian Prudential Regulation Authority, also known as APRA, has told lenders they need to ensure new mortgagees can cope with a three-percentage point rise in interest rates, as they commence reinforcement of changes to home loans in Australia.

Watch the video to learn how this might have an impact on prices within the real estate market.

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Mortgage interest rates may be near their lowest in history, but buyers applying for a new loan will have to ensure they are capable of paying a much higher rate when they inevitably rise in the future.

The banking regulator, APRA, has told Australia’s lenders to increase the minimum interest rate buffer when assessing the serviceability of home loan applications. APRA expects banks to now assess all new borrowers’ ability to meet their loan repayments at an interest rate that is at least three percentage points above the loan product rate. This is to come into effect by 31^st October 2021, and compares to a buffer of 2.5 percentage points that is commonly used at present.

What do these changes mean?

In simple terms, this means banks and lenders must not provide a home loan to a person until they are satisfied that they can still be able to afford the repayments on a rate that is 3.0 per cent higher than the current product's rate.

For example, on a 1.99% home loan, a borrower would be assessed on their ability to repay the mortgage at a bank interest rate of 4.99% - the interest rate plus the new APRA buffer of 3.0%.

Why have these changes been implemented?

This increase in assessment rates has been designed to reinforce the stability of the financial system, ensuring that banks are lending to borrowers who can afford the level of debt being taking on – both today and into the future. It will effectively reduce the maximum borrowing capacity for the typical borrower by around 5 per cent.  For example, someone who could borrow $1 million under the old buffer could now only borrow about $950,000. With buyers able to borrow less money, this could mean less money to spend on property, meaning as a sellers you will need to listen to the market when pricing your home to sell. Regulations to lending such as this are something to consider when trying to predict the market.

Statistics show that one in five new loans approved in the June quarter were at more than six times the borrowers’ income. APRA believes that as the economy bounces back as lockdown restrictions begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted. Regulators will continue to closely monitor risks in residential mortgage lending and would take further steps if necessary.

If you're ready to discover the secrets to being ready to sell your home, download our free insider secrets to being ready to sell checklist.

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