APRA suggests banks relax key lending criteria
Here’s a bit of good news: you may be able to borrow more for your next home loan after the prudential regulator sent a letter to the banks asking them to relax a key lending criteria.
In a letter to lenders, the Australian Prudential Regulation Authority (APRA) has proposed to revise it’s guidance on bank serviceability – which is how a bank assesses whether borrowers can afford their repayment obligations.
Currently all lenders are required to assess loan repayments using the higher of either a minimum 7% interest rate or a 2% buffer above the actual loan interest rate. This is called a ‘benchmark’ rate. Most banks use 7.25% as their benchmark rate.
APRA has now proposed to scrap the 7% interest rate and instead has suggested that lenders use an interest rate buffer of between 2 and 2.5% over the loan’s actual interest rate when assessing a customer’s ability to manage repayments.
How you’ll be assessed
CoreLogic research analyst Cameron Kusher has done a pretty good job of breaking down how you’ll be assessed under these proposed changes:
“If someone is looking to borrow at an interest rate 3.9%, the borrower would previously have been assessed on their ability to repay the mortgage at an interest rate of 7.25%,” he said.
“Now they would be assessed on their ability to repay at a lower 6.4% (3.9% + 2.5% buffer).”
Kusher added that the proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer.
“Furthermore, since 2014 it has become much more difficult to get a mortgage, that is partly because of this serviceability assessment,” he said.
Why the change?
APRA first introduced this guidance when interest rates were higher, and the gap between the assessment or ‘benchmark’ interest rate and the actual rate was not that wide.
It was initially put in place during a time of heightened risk with high house prices, high household debt and subdued income growth, to safeguard borrowers from mortgage stress by ensuring their don’t lend above their means.
With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid had become quite wide in some cases, and possibly unnecessarily so.
What does this mean for borrowers?
The good news is the changes are likely to increase the maximum borrowing capacity for a given borrower.
A family on a combined income of $109,688 would be able to borrow up to $60,000 more if their loan was assessed at 6.25% instead of 7.25%.
This is great news for a lot of home buyers who have been ‘handcuffed’ to their current mortgage due to serviceability issues or for any potential buyers who previously had not been able to get their loan approved.
A four-week consultation will close on 18 June, ahead of APRA releasing a final version of the updated guidance. We’ll then be waiting with baited breath for the lenders to announce their changes.
CoreLogic’s Kusher said the changes will allow some borrowers who can’t quite access a mortgage currently to get one.
“Overall for the housing market, it will mean more people are able to get a mortgage. These proposed changes in conjunction with the uncertainty of the election now behind us will potentially provide additional positives for the housing market,” Kusher said.
In the meantime, if you’d like to find out if these changes might help increase your borrowing capacity, then get in touch. We’d be more than happy to run through your situation with you.
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