The Australian Prudential Regulation Authority (APRA) has agreed banks can reduce their current serviceability assessments when processing home loans.
APRA’s revision will mean that more customers can more easily achieve home ownership or that next upgrade. It has been calculated some home buyers will be able to secure loans some 14 per cent higher than under the prior rules, which is a nice buffer when turning up to Saturday auctions.
A couple with a combined $200,000 annual income will have an extra $150,000 borrowing capacity, as those applying for a 3.5 per cent loan will be tested with a 2.5 per cent buffer, so against a 6 per cent benchmark, not the current fixed 7 or 7.25 per cent.
It comes at a time when housing credit growth is the lowest it has been since records began four decades ago, with the number of loans to owner-occupiers and investors down across all segments of the market.
The property industry reckon lending constraints imposed on the banks by APRA caused the highest ever levels in declined home loans.
It also comes when the ratio of household debt to disposable income is at historical highs, an issue the RBA has occasionally highlighted as a potential vulnerability to the financial stability of the economy.
It is to be hoped that the lenders meet their responsible lending obligations to make sure home loans are not given to risky borrowers.
The lenders have been told to incorporate an interest rate buffer of 2.5 per cent in their serviceability assessments. This would, of course, ignore introductory honeymoon rates. The prudent lending environment, especially in the Sydney property market, was well founded, but it has been debated over recent months just what is enough padding to withstand any potential large spike in the official cash rate.
APRA’s serviceability buffer dates back to December 2014, when the cash rate was 2.5 per cent. Between 2015 to 2017, APRA pursued further tightening including restrictions on high LVR and investor lending, along with restrictions on interest only lending, and more responsible lending assessments through greater verification of income and expenses.
These regulatory measures and prudential supervision were against the backdrop of the Royal Commission into banking which has prompted an internal shift in the culture of lending.
An interest rate buffer of 2.5 per cent is cautious. Looking back over the last 30 years, the average time it takes to breach around 2.5 per cent rise is six or so years, which provides borrowers plenty of time to adjust spending habits to minimise the ‘‘shock’’ of higher repayments. Wage growth over these periods helped offset higher repayments.
David Koch puts property price falls in perspective
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Notwithstanding APRA’s move, be aware it is still taking longer to obtain finance even as lenders automatically now have more information about your credit history.
Would-be spring buyers need to get on to their lenders or brokers in coming weeks to secure approvals.
Or head to the less regulated, non-ADI residential mortgage lenders. Despite representing 5 per cent of outstanding loans, non-bank lenders saw 12.5 per cent of growth in lending over the past year.