This week the Australian Prudential Regulation Authority (APRA) intervened in the property market by tightening some of its rules around borrowing and loan serviceability.
APRA wrote to banks and told them they had until the end of this month to increase the rates at which they calculate a borrower’s servicing power from 2.5% to 3%. What this means is that banks will now stress test loan applicants by calculating whether they can pay 3% higher than their current interest rate, rather than the previous 2.5%. So if you are applying for a loan with a 2% interest rate for example, you’ll have to demonstrate you were able to service a 5% loan in order to be approved. The reason they do this is to make sure individual borrowers can handle future interest rate rises without going bust.
What APRA hopes will happen as a result is that some of the steam will come out of the housing market.
They made the call after their latest data revealed more than a fifth of new loans have people borrowing six times or higher their annual income, something they regard as a level of concern. In the meantime, national property values have increased by more than 20%.
What does this mean money wise?
In a nutshell, APRA believes the change will result in a 5% reduction in a household’s maximum borrowing power.
So if your borrowing capacity was $1 million previously, it will now be $950,000. If it was $500,000, it will now be $475,000.
The numbers are significant enough to knock a bit of buyer competition out of the market and also stop those close to full capacity from biting off more than they can chew. However, those who borrow well within themselves won’t necessarily be negatively affected.
The fix is in
For variable rates, the 3% buffer is added to the rate that you are offered.
However, if you’re wanting to apply for a fixed rate loan, beware, you may be in for more of a shock under the new rules. This is because banks will calculate your 3% buffer based on the revert rate, rather than the fixed rate. The revert rate is the rate the loan will roll over into once the fixed period is up. So, if you are applying for a fixed loan with a 1.99% rate in the fixed period, but that rate reverts to 3.5% afterwards, the bank will calculate your serviceability at 6.5%, rather than 4.99%.
Seems like APRA always targets investors
Investors are often seen as cashed up magnates who swoop in and whisk properties away from the first home buyers and families who so desperately need them.
This is why APRA restrictions in property booms are usually set up in a way that investors are deterred by higher rates or more taxes, so that owner-occupiers can buy homes with less competition from people who may already own multiple properties.
APRA believes investors tend to borrow at higher levels of leverage than owner-occupiers and also have existing debt already, which may expose them to more risk. This is why investor loans always have higher interest rates than owner-occupier homes. Because the rates are already higher, the new buffer will affect investors even more. Not only that, but the buffer will be applied to their existing debt too.
Is this temporary?
It might be temporary, but if the measures don’t have APRA’s desired effect, things might get even tougher before they get better, so it’s important to adapt and evolve if you’re looking to build the kind of property portfolio that will help you live life on your own terms.
Things just got harder for investors, but there are always options out there and value to be found.
If you need help making sense of the new rules, what it means for you and how to tailor you strategy going forward, reach out to the Zinger Finance team.