APRA lifts interest rate buffer

APRA lifts interest rate buffer

Australia’s house prices have boomed over the past 12 months thanks to low-interest rates, cashed-up ex-pats returning home from overseas and excess savings built up by locals, and according to leading property data company CoreLogic, the rise in home values across the nation is an average of 20%, which means owning property is becoming increasingly unattainable for some hopeful buyers.

In a move to both help suppress the speed of growth and to ensure borrowers can afford to service their home loans in the instance interest rates rise, the Australian Prudential Regulation Authority (APRA) is focussing on reducing the maximum amount that home buyers can borrow.

What changes is APRA making to lending requirements?

Previously, in addition to the usual lending criteria, banks were also required to assess if a potential borrower could still meet their loan repayments if interest rates rose by 2.5 percentage points above their current mortgage interest rate. This test is now increasing to at least 3 percentage points.

How will APRA’s changes affect existing homeowners?

Existing homeowners who are not in the market for a new home loan will not necessarily be affected by the introduction of APRA’s latest lending requirements but should be mindful that interest rates could rise from the all-time lows experienced during 2020 and 2021. Those who refinanced during the peak of the pandemic should consider how an interest rate increase could affect their current circumstances and plan accordingly, so their lifestyles are not affected or their mortgage payments become too much of a strain.

Will APRA’s changes make it harder for first home buyers?

It is estimated that the changes will reduce the borrowing capacity of a typical borrower by about 5%. Although this is only a small percentage, this can equate to tens of thousands of dollars that buyers now won’t have available to them in an already competitive market. First home buyers, those seeking to get back into the market, or investors looking to purchase additional properties may find that they are limited in how much they can borrow as banks are forced to help quell the number of households suffering from mortgage stress.

When will banks start applying the test?

From 1 November 2021, banks will be required to apply the test to confirm that new applicants would be able to comfortably manage their mortgage repayments if the current interest rate rose by at least 3 percentage points.

Will the tightened lending conditions really drive down property prices?

It is thought that the change to lending requirements will only result in a modest change to property prices and the greatest impact will be to the pace at which they continue to rise. If housing prices continue to grow at the pace they have been over the past 12 months, APRA has not ruled out implementing further changes to halt the growth.  

What other measures are APRA considering to lower property prices?

It has recently been reported that APRA is also considering restricting lenders from allowing borrowers to take on debt that is more than six times their incomes and placing limits on loans deposits smaller than 20%. It has been proposed that these changes may be introduced over the next few months.

How long will it take for the interest rate buffer to make a difference in the property market?

Economists have predicted that it will take anywhere from a few months to a year before the impacts of the restrictions begin to reach the market, but that they may only be marginal and have an effect by stunting the rate of growth for property prices rather than driving prices down. If APRA decides to bring in further restrictions we could see prices reduce, however, this could also take many months.

For more information on this recent change, contact our experienced Mortgage brokers on (07) 4052 0750.