All lenders will now have to test potential home loan borrowers on whether they would still be able to afford mortgage repayments if their interest rates rose to be 3% above the current rate.
The Australian Prudential Regulation Authority (APRA) have increased the minimum interest rate by 50 base points (from 2.5% to 3%) as it believes will provide an important contingency for interest rates rises over the life of the loan, and any unforeseen changes in the borrower’s situation.
This move doesn’t come out of the blue though. Treasurer Josh Frydenberg flagged tougher lending standards a week prior following a meeting with the Council of Financial Regulators.
the combination of record low interest rates and the cost of the typical Australian home increasing more than 18% – the fastest pace of growth since the late 1980s – has made financial regulators a little worried homebuyers may start to stretch themselves thin and borrow more debt than they can safely afford.
APRA did consider limiting high debt-to-income borrowing but believed it would be more operationally complex to deploy consistently.
“And it may lead to higher interest rates for some borrowers as lenders effectively seek to ration credit to this cohort,” APRA adds, but it doesn’t rule out limiting high debt-to-income borrowing in the future.
The increase in the interest rate buffer will apply to all new borrowers, however the impact is likely to be greater for investors than owner-occupiers, according to APRA.
“This is because, on average, investors tend to borrow at higher levels of leverage and may have other existing debts (to which the buffer would also be applied),” APRA adds.
“On the other hand, first home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit.”
If you’re worried about how this latest announcement from APRA could impact your upcoming application for a home loan, then get in touch with Allied Finance today.
We can apply APRA’s new loan serviceability tests to your personal circumstances to help you determine your borrowing capacity and focus your house hunting.
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