As property markets soared and so did debt levels last year, it was the Australian Prudential Regulation Authority (APRA)- rather than the RBA- that stepped in with regulatory measures aimed at cooling the market and removing some of the risk exposure that had been taken on by households that may have been over leveraged.
APRA did this by raising the repayment buffer on mortgage applications from 2.5% to 3%…and also by sounding the warning bells on Debt-To-Income (DTR) ratios.
What was so concerning?
For many years there had been this unofficial messaging that a borrower could generally expect to be granted a loan of up to around five times that borrower’s annual income.
However, APRA was concerned to note that the level of debt exposure by Australian borrowers was starting to creep up.
Specifically, it estimated around 20 per cent of recent loans actually had a DTI of more than six… ie a household was borrowing more than six times its annual income.
It sounds like a marginal increase, but in some households, the difference between that amount and the old one/fifth yardstick was more than $150,000, which is considerable added exposure. And the concern was that if there was no agreed standard in place, this could keep slipping higher.
What did they do about it?
After the issue was flagged by APRA, a number of banks took action and now have caps on their DTI limits of six times the income. The fallout of this could mean that if you are a would-be borrower, you may no longer be eligible for a loan that you thought you were.
This affects owner occupiers especially, as they are more likely than investors to be borrowing at their full capacity in order to purchase a single property.
And combining that hurdle with the 3% repayment buffer that we mentioned earlier, owner occupiers receive somewhat of a double whammy.
That buffer is in place so that lenders can see if you would still be able to service a loan if interest repayments went up, which a lot of people are expecting them to do.
And if you are one of the borrowers that locked in a fixed rate for a certain period, you are also likely to get a nasty surprise when the fixed period ends and the loan rolls over into a much higher variable rate than you had originally expected.
How do these changes benefit investors?
The situation will be more prohibitive for investors than it used to be, but things are looking peachy when compared to owner occupiers.
This is because investors often use equity as a deposit and are able to borrow at a more favourable Loan to Value Ratio than owner occupiers (eg they may only need to borrow 50% of the property’s value). They also have the advantage of rental income to help service the loan; rental income which has been on the rise across the country as vacancy rates fall and will only increase further as inflation takes off in Australia.
Then there’s the fact investors usually borrow interest only (at least to begin with), which means they won’t be as stretched by the repayment buffers in place.
So what does it all mean for me?
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