Rising house prices and ballooning household debt levels have prompted APRA to tighten up lending regulations. This comes about as more than 1 in 5 mortgage holders have borrowed more than 6 times their income, which APRA see as being too risky.
This week, the regulator wrote to Australia’s banks to let them know they need to apply a bigger buffer when calculating how much someone can afford to borrow.
The old stress test
Before this announcement – which will come into effect in November – banks had to apply an extra 2.5% buffer to their base variable interest rate when working out someone’s borrowing capacity.
For example, if the bank’s base variable interest rate was 2.69%, they had to calculate the applicant’s borrowing capacity based on whether they could afford to pay back their loan assuming a 5.19% interest rate (2.69% + 2.5%).
The new stress test
APRA now want banks to add a 3% buffer (instead of the usual 2.5%). In the example above, this means the applicant’s borrowing capacity needs to look at how much they can afford to pay back based on an interest rate of 5.69% (2.69% + 3%).
Impact on borrowing power
APRA estimates these changes will lower people’s borrowing power by about 5%. So if you were previously able to borrow $1M, you may now only be able to borrow $950k. And if you hadn’t planned to borrow right up to your maximum amount, these regulatory changes may not impact you at all.
Speak with an expert
You only ever want to borrow what you can afford to pay back, but we also want to help you borrow what you need to make your property goals a reality. Get in touch to discuss how to put your best foot forward when it comes to applying for a home loan.