21 Oct APRA’s New Mortgage Rule: What It Means For You as a Borrower
Australian Prudential Regulation Authority (APRA) has increased the minimum interest rate buffer it expects banks to use when assessing a person’s “serviceability” from 2.5 per cent to 3.0 per cent above the loan product rate. What does this exactly mean?
To put it simply…
This change means banks and lenders must not provide a home loan to a person until they are satisfied they would still be able to afford the repayments on a rate that is 3.0 per cent higher than the current product’s rate.
Starting November, 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.
What is APRA and what do they do?
The Australian Prudential Regulation Authority (APRA) is Australia’s financial system prudential regulator. It is responsible for promoting the prudent management of regulated institutions so that they can meet their financial obligations under all reasonable circumstances.
Will I be affected?
If you are an owner-occupier and or an investor taking out a new home loan, yes you will be affected.
How would I be exactly impacted?
Right now, this change does not directly affect any current loans, but it will reduce the new maximum loan amount for a typical borrower by around 5%. If you’re thinking about taking out a home loan soon and want to understand and discuss the specific impacts on your financial plans, send me a message today.
What is a serviceability buffer?
Banks are required to examine a borrower’s ability to repay a loan at a higher interest rate than those offered today. This ensures when interest rates rise, as they eventually will, borrowers aren’t stressed by the higher repayments. The amount that banks add on to the market interest rate is known as the serviceability buffer.
Banks currently use a 2.5% serviceability buffer but APRA’s new rule will see this increase to a minimum of 3.0%. That means if you applied for a new loan with a 2.49% interest rate, you would either be assessed on your ability to repay the loan at 5.49% (2.49% + 3.0%) or the bank’s floor rate, whichever is higher.
When will banks and lenders implement the new buffer?
The changes will take effect on 31 October 2021.
What next steps should I take?
APRA is expected to use additional tools to curb bank lending if high levels of lending to indebted borrowers continues despite its higher buffer.
If you are a first time home buyer, once you applied for a mortgage with an interest rate of 2 per cent on November 1, the bank would be testing to see if you can afford to make repayments with a 5 per cent interest rate. If you could not, the loan application would be denied. If you want to discuss your current financial circumstances, please get in touch.
If you have a fixed rate home loan, no announced changes yet and will likely vary between banks. So, before you take any action, please get in touch with me for the most up to date information. Give me a ring on 0408 081 082.
Credit Representative Number 486927 is authorised under Australian Credit Licence 389328.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.