In November 2021, the Australian Prudential Regulation Authority (APRA) will implement some changes around how they assess the serviceability of home loan applications. Currently, Australian lending institutions use a serviceability buffer rate of 2.5% on top of the product rate as a way of stress testing a client’s ability to withstand fluctuations in interest rates. In November, this buffer rate will increase to 3.0%.
From the point of view of the banks, the buffer acts as a security measure to ensure the client’s ability to service the proposed mortgage at an inflated rate. The buffering rate set by APRA is a measure to keep Australians from falling into financial hardship should the economic conditions change.
APRA’s decision to increase the buffer rate comes as recent figures reflect an alarming increase in applicants borrowing at more than six times their household income. With most of the country now opening up to a potentially booming post-COVID-19 economy, concerns around the highly leveraged mortgage market presents a genuine risk to future financial stability.
While the impact to the ability to borrow will be felt across all aspects of mortgage lending, investment debt will be the hardest hit in the new APRA changes. This is predominantly due to the terms at which owner occupied and investment debts are assessed. The average residential home loan is assessed and established at a term of 30 years on principal and interest reduction while investment debt is assessed at the remaining term post interest-only period. For example, if an investment loan is proposed at five years interest only and 25 years principal and interest, the serviceability is based on the applicant’s ability to repay the debt over 25 years. Ultimately, the shorter the loan term, the larger the impact to servicing.
First home buyers looking to enter the market will also take a hit to their borrowing capacity as the booming housing market is causing the group to stretch to their absolute maximum. With serviceability thresholds being the primary constraint for many young Australians looking to buy their first home, the changes add an element of uncertainty in purchasing power. First home buyers who have an existing pre-approval at a lender may need to trigger a review to provide clarity on exact borrowing power.
Ultimately, APRA’s implementation of increased buffer rates is a targeted action designed to reinforce financial stability and protect Australians from financial hardship. The changes highlight the importance of financial advice regarding appropriate debt structuring and emphasise the need to understand home loan lending commitments for the short and long term.
At Partners Lending, we pride ourselves on our ability to help clients navigate through their borrowing journey. For more information on the above, and to see how we can assist your clients with getting approval in place so they can purchase with confidence, contact a lending advisor from Partners Wealth Group today on 1800 333 143.