Many personal and home loan borrowers may find it harder to get approved for a mortgage after the Australian Prudential Regulation Authority (APRA) adjusted home loan serviceability tests.
Who will get hit the most by these changes, and why are they implementing them in the first place?
APRA recently raised the minimum interest rate requirement that banks benchmark when evaluating a home loan’s serviceability from 2.5% to 3%. As a result, lenders will now assess whether the borrower can still afford mortgage repayments after the hike, implying that some borrowers are at risk of falling short of the test.
The authority also states that increasing the buffer rate will reduce an average borrower’s maximum borrowing capacity by roughly 5%. That’s because it offers a necessary contingency and wiggle room for interest rate fluctuations throughout the loan term.
Why is APRA Raising the Buffer Rate
APRA’s decision to raise the minimum interest rate buffer involves a handful of relevant factors and years of historical data. To date, interest rates are hitting record-low levels, yet a standard Australian residential property has become 18% more expensive compared with last year.
That implies a drastic rise since the late 1980s and has made federal and financial regulators concerned that home buyers may overstretch and borrow more debt than they can repay.
APRA Chairman Wayne Byrnes reported that roughly 22% of home loans approved in June were as much as six-fold higher than the loanee’s annual income. With that, APRA thought it would be challenging to consistently limit a high debt-to-income ratio.
The same option may also result in higher overall interest rates since lenders will minimise loan risk. Yet APRA claimed that it’s still open to limiting the debt-to-income borrowing in the future.
Who will be most affected by these changes?
The new loan applicants and borrowers will be the most vulnerable to interest rate buffer hikes. But looking at the big picture, investors will be hard hit than owner-occupiers.
That’s because investors would apply for larger loan amounts than applicants who will occupy the residential property. They may also have other existing debts to which the same buffer increases will also apply.
On the flip side, first home buyers (FHBs) are most likely limited by their deposit amount, so the impact on tougher serviceability tests tends to be less evident or significant.
If you’re still planning to apply for a home loan, should this mean trouble for your hopes?
To know how much of an impact the rate changes will have on your home loan application, please reach out to us today. We’ll thoroughly discuss APRA’s new loan serviceability tests and your borrowing capacity to help you find deals that suit you best.
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