Home Loan Lending Just Got Tougher!
by Leigh Martinuzzi
The Australian Prudential Regulation Authority (APRA) is a statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry. They assist to keep the property market in check, and they do this by creating lending regulations for our banks. They’ve recently intervened amid concerns of a booming property market that has no signs of slowing. Their objective is to reduce lending risk in fear of rising interest rates which the RBA has clearly indicated will be unlikely to rise anytime until 2024 or after. How will this affect you?
When assessing your borrowing capacity banks won’t simply assess you based on the current variable rate, they will assess you on a higher borrowing capacity of ‘floor rate’. This is their way of mitigating lending stress should interest rates suddenly rise. Banks will firstly add 2 to 3 per cent to the current cash rate, which currently remains at an all-time low of 0.1%, to establish their Standard Variable Rate (SVR). This is to cover the funding of the loan and so they can earn profit. On top of this is another 2 to 3 percentage points, known as an assessment rate or floor rate. This buffer is to help ensure lending serviceably. With APRA steeping in this assessment rate now needs to be 3% higher than the product or loan rate. Previously this was 2.5%.
For example, the CBA’s base lending rate was 2.69% and the floor rate was 5.25%, slightly above the required 2.5%. CBA will now assess borrowing capacity at a new ‘floor’ rate of 5.69%. Westpac’s base rate is 2.49% with an old floor rate of 5.05% and a new rate of 5.49%. Although interest rates are not increasing this will certainly make it harder for many would-be-lenders to get a loan with already tightening lending assessments in place.
I wonder, will this be enough to slow the booming property market? And who will it most largely affect? My immediate thoughts are that it won’t be enough to slow the current market particularly if the market continues to rise post lockdown, which many experts expect will happen. My reason for this is because I feel this initiative will target the wrong buyers, while many of our current and top paying purchasers will be unaffected or only slightly affected by an increasing assessment rate.
Rising house price rises have made it harder for first-home buyers to obtain a loan. The lower cash-rate and assessments rates, which APRA changed in 2019, have increased borrowing capacity for many by as much as 15% and even up to 22%. So, even with rising house prices, many first-time homebuyers still have the chance or buying a home. However, getaway property prices are making it harder for many, or at least buyers’ expectations as to what they can afford has had to have a major realignment. Trying to save for a deposit for a house is also increasingly difficult. It will be new home buyers that will find this move by APRA most challenging.
Those of us on good incomes with stable employment and larger equity and resources to tap into, I don’t believe will be impacted by this move. I think first home buyers are the ones that will be most impacted. This move may also have adverse effects on others too. For example, for investors to accommodate the higher assessment rate many may choose to increase rental fees. In a time of limited rental supply and already surging rental prices, this move may just make it harder for tenants too.
I agree that the current market increases need to stabilise and yet I am not sure this is the best solution. My guess is that we will see more APRA intervention in the months ahead. The property market remains strong however we have seen it slowly softening and most of the banks predicting a stabilising market next year. With lockdowns set to end, we may see a further price hike over the next few months. At the same time, I also feel that as national and international borders reopen and the economy plays catch-up we might just see money being used elsewhere other than property and therefore slow buyer demand.
