The Australian Prudential Regulation Authority (APRA) has announced an increase in the minimum interest rate buffer on home loan applications, moving from 2.5 to 3 percentage points. By increasing the minimum interest rate buffer, APRA has tightened the borrowing power for home loan applicants, and they estimate it will reduce the maximum borrowing power for the average borrower by around 5%.
This move comes after a year where Australian house prices have reached record highs and growth levels have occurred at levels not seen since 1989.
As a result of these changes, from November 1st, banks will be required to test if new borrowers can afford their mortgage repayments in the event of home loan interest rates rising three percentage points above their current rates.
Commenting on the new regulations, APRA chairman Wayne Byres said the move has to lower risks from an increasing number of huge mortgages.
Buying Your First Home?
Download our 15+ page guide today!
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” he said.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.”
What this means for your borrowing power
This move is hugely significant for those who want to borrow the most money they can since now your capacity to borrow is being reduced.
For example, if a lender had previously estimated your borrowing capacity at $500,000 as your maximum, these changes mean that it would be reduced to $475,000.
These new rules will not affect your plans if you want to get a mortgage and not use your maximum borrowing power.
In response to the recent changes, Commonwealth Bank has announced that any existing pre-approvals will be honoured, and customers that have exchanged contracts but haven’t settled will still be able to finalise their deal, but these changes will impact new applicants.
CBA chief executive Matt Comyn welcomed APRA’s move in an official statement from the bank.
“We believe that APRA’s announcement to increase the serviceability floor is a sensible and appropriate step to help take some of the heat out of the housing market,” he said.
“Having increased our floor to 5.25 per cent in June we think this further step will provide additional comfort for borrowers and is a prudent measure for lenders.”
APRA also has additional tools available to curb lending if the situation worsens, such as limiting new loans with a debt-to-income ratio of six times or more and lifting the serviceability assessment floor rate from 5.09% to a higher rate.
In the coming months, it’s also expected that APRA will produce an information paper detailing its future framework for implementing policy.
Calculate your LVR
|Loan amount||$390,000||Loan to value ratio (LVR)|
Tips for your situation
|Loan amount||$410,000||Loan to value ratio (LVR)|
Tips for your situation
Copyright © Finconnect (Australia) Pty Ltd trading as "eChoice", ABN 45 122 896 477 Australian Credit Licence 385888, is a wholly owned subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
The purpose of this calculator is to assist you in estimating whether you will need to pay lenders mortgage insurance (LMI) based upon the information you put into the calculator.
The results of this calculator are estimates only. They are based on the information you have provided. If you change any of the information, you will obtain a different result. Other fees, charges and costs may apply.
The actual amount you can borrow, and the applicable loan repayments, can only be determined once you submit a full application to us and we assess your application using our credit criteria applicable at that time.
Before acting on the results of this calculator you should seek professional advice and speak to an eChoice consultant.
In a rare act of bipartisan support, both the Treasurer and Shadow Treasurer agree that the move to lower borrower risk is necessary to maintain the health of the Australian economy.
“We must be mindful of the balance between credit and income growth to prevent the build up of future risks in the financial system,” Treasurer Josh Frydenberg told The Sydney Morning Herald and The Age.
“Labor knows that housing affordability is a major issue for Australians,” Shadow Treasurer Jim Chalmers said.
“For eight long years things have only been getting worse under the Liberals and Nationals, who’ve pretended that it’s not their problem.”
Words by Rimas Veselis
- APRA’s mortgage crackdown catches out hopeful home buyers
- APRA tightens home loan rules on the same day New Zealand’s Reserve Bank lifts interest rates
- Why the next home loan you take out might have to be smaller
- Banks given new borrowing rule as Australian house prices soar
- Regulator calls time on housing market party, tightens standards
Take advantage of lenders cutting their home loan rates! Speak to one of our home loan experts to compare hundreds of products across 25 lenders, and find the option that’s right for you!