Tougher serviceability tests for home loans will make it harder for some borrowers to get a mortgage, but older Australians could also bear the brunt of the changes announced by the Australian Prudential Regulation Authority (APRA) earlier this month.
The minimum interest rate buffer on home loan applications has increased from 2.5 to 3 percentage points in an attempt to reduce “maximum borrowing capacity for the typical borrower by around 5 per cent”.
What this means is that, from November, banks will test whether borrowers can afford mortgage repayments if interest rates were 3 percentage points above their current rate.
Essentially, anyone who applied for a mortgage with an interest rate of 2 per cent on 1 November would be tested to see if they can afford repayments with a 5 per cent interest rate.
Loan applications would be denied to anyone who can’t meet these requirements.
APRA says the move “will not have any impact on mortgage interest rates”, it will reduce the maximum amount people can borrow relative to their income and expenses.
While the rule change will hit first-home buyers it is likely to affect investors more than owner-occupiers. This is because investors tend to borrow at higher levels of leverage and may also have other debts to which the buffer would be applied.
In the past 12-18 months, a number of factors – such as record low rates, limited property stock, and increased competition – have combined to cause a significant increase in lending approvals from both banks and non-bank lenders, says Compare Club Home Loan specialist Matthew Gatt.
“Unsurprisingly that’s led to a strong increase in property prices across the board in the same period,” he says.
Mr Gatt says property prices may begin to correct themselves in the near future, against original predictions of further increases in the coming months and years.
“Many property value prediction models that we’ve seen are predicting a further rise in property values. The first-home buyer market will really feel the impact of this, so it’s not surprising that APRA and others are moving to cool the market softly,” adds Mr Gatt.
“Consumer borrowing confidence is still high, which is leading to higher debt amounts to cover home purchases, renovations and debt consolidation.
“But as an industry, we need to make sure that we are proactively balancing consumer desire for higher loan amounts, with managing the potential risk of homeowners falling into hardship if the market changes in the future.”
The APRA changes weren’t unexpected, “although have come quicker than the market anticipated”, says Mr Gatt, adding that this policy announcement will be the first of many more changes to come.
“What this means for homeowners and buyers is now is a good time to get their mortgage sorted before APRA’s changes kick in. It could be more difficult to get a loan or refinance in the near future, so by acting now, people can minimise any negative impact on their borrowing ability,” he says.
He also underlines the value of over-50s “getting their house in order” to ensure a more comfortable retirement with little – or no – debt.
“As you’re leading up to retirement, it’s important to ensure your mortgage product is working for you,” he says.
“If you’ve had your mortgage in place for over two years, it’s likely there are new mortgage lenders, products and features that would better suit your debt paydown and debt payout strategy.
“A good broker could definitely review and recommend to you.
“This is critically important to review as it could mean the difference between a debt free retirement or possibly one of financial stress and hardship, or even the ability to retire years earlier than you otherwise would have.”
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