APRA toughens mortgage rules as Australians take on more debt

The Australian Prudential Regulation Authority (APRA) has tightened rules on home lending, which is expected to reduce the average borrower’s maximum borrowing capacity, as Australians in the housing market increasingly take on debt .

APRA strengthens the rules on home loans. Source: Shuang Li / Shutterstock.com.

Today, APRA wrote to banks asking them to increase the “sustainability buffer” they use to value mortgage loans.

The cushion is a number used by banks when calculating the amount they are willing to lend to a potential borrower. It is added to the interest on the loan, to try to give an idea of ​​a borrower’s ability to repay the loan if interest rates were to rise in the future.

It is currently 2.5 percentage points above the interest rate on any product requested by a borrower, and APRA has asked banks to increase it by 0.5 percentage points, up to a minimum of 3 percentage points by October 31.

Why is APRA now tightening the borrowing rules?

APRA Chairman Wayne Byres said today that the regulator wants to tighten the rules on lending to ensure the stability of the financial system.

“By taking action, APRA works to ensure that the financial system remains secure and that banks lend to borrowers who can afford the level of debt they take on, both now and in the future. ‘future,’ Mr. Byres said today.

“While the banking system is well capitalized and lending standards have been broadly maintained, the increase in the share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks for the financial stability build up.

“More than one in five new loans approved in the June quarter represented more than six times the income of borrowers, and at the aggregate level, growth in home credit is expected to outpace growth in the home loan. household income over the coming period. “

“As the economy is expected to rebound as lockdowns begin to be lifted across the country, the balance of risks is such that higher service standards are warranted,” Byres said.

In other words, APRA is asking banks to tighten their service standards, with the aim of minimizing the number of home loans given to people who ultimately cannot afford them.

How is the Australian real estate market looking?

Canstar financial expert Steve Mickenbecker noted that new home loans are booming right now, up almost 47% from a year ago, while house prices have risen sharply. ‘about 20%, which means borrowers take on larger loans.

“The competitive and still falling interest rates and the recent steps taken by two major lenders to cut their interest rates only show how eager banks are to lend in this booming market,” he said. he declares.

“APRA’s decision today is forward looking to take into account future interest rate hikes. Big loans that can be affordable at today’s lower rates can turn into stressed loans when rates are 4% or 5% higher.

A recent Canstar survey found that 57% of Australians expect house prices to rise further in the next three months, and in light of rising house prices, APRA has stepped in to try limit borrowers who take out home loans that they may be hard pressed to afford. in the years to come.

How will APRA’s decision affect average Australian homebuyers?

According to Canstar Research conducted on October 6, 2021, the latest changes to APRA loans could have the following effects on hypothetical borrowers of different income levels:

  • Low-income borrowers (earning $ 39,000 annually) may have their borrowing authority reduced by $ 8,000 to $ 158,000.
  • Middle-income borrowers (earning $ 59,800 annually) could see their borrowing power drop by $ 70,000 to $ 321,000.
  • Middle to high income borrowers (earning $ 90,500 per year) could see their borrowing power decrease by $ 30,000 to $ 548,000.
  • High income borrowers (earning more than $ 130,000 per year) may have their borrowing authority reduced by $ 47,000 to $ 835,000.

Would this be a godsend for first-time buyers?

“APRA is tackling stability rather than house prices, but it must also hope that falling loan volumes can dampen house prices,” Mickenbecker said.

First-time homebuyers whose income is strained by repayments will inevitably have a harder time entering the market, but this move does not affect the ability of first-time homebuyers to save a down payment, which is historically a major problem.

Mr Mickenbecker added that investors who “ration” equity on multiple loans may be more affected by the upcoming changes, with lenders having to factor in the increased reserve against existing loans when assessing the usefulness of any new application.

This may ultimately be an advantage for first-time buyers if it means the market becomes less crowded, but there may be other changes to come.

The buffer increase is a start for APRA, but new measures would not surprise if the market explodes after the lockdown, as many expect, ”Mickenbecker said.

Cover image source: Jax10289 / Shutterstock.com

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Priscilla C. Carnegie