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In a move that will make it harder for some borrowers to get a mortgage, the prudential regulator of the Australian financial services industry has announced stricter serviceability tests for home loans.
In a letter to lenders, the Australian Prudential Regulation Authority (APRA) has increased the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points.
The regulator estimates that the move will reduce "the maximum borrowing capacity for the typical borrower by around 5%,” while it "will not have any impact on mortgage interest rates."
Bank stocks reacted negatively to the announcement, as the ASX200 Bank – a sub-index to gauge movement of banks within ASX200 – corrected by 1.05% in the early morning trade.
So, what does the new rule mean?
From the end of this month, the banks will have to test whether new borrowers can still afford their mortgage repayments if home loan interest rates rose to be 3 percentage points above their current rate. At current they test it at 2.5 percentage points over the current level. Suppose the interest rate on a home loan you are borrowing is 7.5%. In that case, your repaying capacity must be tested at 10.5% from October end. With old rules, your repaying capacity would have been tested at 10%.
How does it impact home loans?
For home loan applicants, it means the maximum amount people can borrow relative to their income and expenses will be lower than it was under the old serviceability test of 2.5%. A 50 basis points increase in the serviceability buffer will reduce the maximum borrowing capacity for the typical borrower by around 5%. So, if you had the capacity to borrow AU$1 million for buying a new home, now you can only borrow AU$950,000 – with all other factors remaining same.
But why is RBA getting strict?
RBA is of the opinion that the housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers. In the June quarter, more than 20% of authorised deposit-taking institutions’ (ADIs) new lending was to borrowers who had borrowed more than 6 times their pre-tax income. The prudence regulator thinks that this is high by both historical and international standards – and without action, the share is likely to increase further.
“While these trends have been emerging in the past couple of quarters, APRA and other members of the CFR have been wary of intervening while large sections of Australia were in lockdown, and many sections of the community were under economic stress,” it explained. The regulator has also said that its move has been supported by other members of Council of Financial Regulators (CFR). “However, with lockdowns soon to be lifted, and expectations that the economy will bounce back, APRA considers the balance of risks has shifted such that a timely adjustment to serviceability standards is now warranted,” it added.
