Kathryn Lee - 17 Jul, 2019

APRA loosens rules on residential mortgage lending

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The Australian Prudential Regulation Authority (APRA) has announced it will relax mortgage assessment guidelines, making it easier for applicants to secure a home loan.

APRA, the body in charge of regulating the financial services industry, stated that lenders are no longer expected to assess home loan applications using a minimum 7% interest rate. Instead, lenders are now allowed to set their own assessment rates within a 2.5% buffer of the product rate.

A bit of background

Until recently, a mortgage lender would assess an applicant’s ability to pay a loan with an interest rate of at least 7%. Even if the consumer had accepted a rate between 3 – 4%, a higher rate was applied as a stress test or buffer.

This means that even applicants capable of servicing a 4% loan might not have secured a certain loan due to their inability to service the hypothetical 7%.

This floor rate was introduced by APRA in 2014 when the average mortgage rate was between 5% and 6%, according to Finder. Now, with much lower interest rates available and a broader range of loan products, a 7% standard is redundant.

A need for change

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According to APRA Chair, Wayne Byres, the 7% figure is “higher than necessary” in the current economic environment and is not an essential part of maintaining “sound lending standards”.

“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” said Byres, during his statement on the new guidelines.

The change of regulations comes after years of dropping interest rates, which were significantly higher in 2014 – when the guidelines came in.

Australia is still seeing record low interest rates, with the RBA lowering the cash rate again earlier this month. This historic drop is a reaction to global economic conditions, as well as slow income growth and low consumer spending on our own shores. 

The advantages

Following APRA’s changes and the Reserve Bank’s all–time low cash rate, lenders will be more inclined to accept loan applicants in the coming months. Applicants may also find themselves nabbing a better deal, with more wiggle room – something that would not have been available without these changes.

“It will allow first home buyers more of a chance to get into the market because they’ll have more borrowing power,” financial advisor and Talking Money founder, Melissa Meagher, explained. “Just make sure you know what you can afford.”

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Depending on where you are with your present debts, the changes may also provide a good opportunity to refinance and consolidate any outstanding loans.

The risks

While the changes may appear to be a long time coming, it is important lenders remain somewhat conservative.

“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs (authorised deposit–taking institutions) actively consider their portfolio mix and risk appetite in setting their own serviceability floors,” Byres said.

“Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

Although this is a positive change for buyers, consumers should remember not to overextend themselves – particularly if interest rates start to climb.

According to financial advisor, Melissa Meagher, consumers should be less focused on what the banks are willing to lend, but rather, what they can afford.

“It’s about people being clear on their numbers and understanding what they can afford to repay [of a mortgage], as well as the costs associated with purchasing and maintaining a property,” Meagher said.

Words by Rebecca Mitchell

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