APRA Tightens Loan Serviceability

It’s been an expected move, and the Australian Prudential Regulation Authority (APRA) has followed through with it. They have formally announced the tightening of lending rules for Australian homebuyers, raising the serviceability buffer from 2.5% to 3%.

Wait… what is the serviceability buffer?

When a bank lends you money to buy a home, they assess your ability to make the repayments on the loan at a higher interest rate than the current one. This ensures that when rates rise (or there’s an economic shock or downturn), you’re still in a financial position to make your repayments.

The amount the lender adds onto the current product rate (or floor rate) is the serviceability buffer.

What does this change mean?

This adjustment increases the serviceability buffer by .5% from 2.5 to 3%. Let’s say most banks are giving out home loans at around 2% interest today. If you’re applying for a home loan, you will now be assessed at whether you can pay back your loan at 5% interest, i.e. 2% plus the 3% serviceability buffer.

According to savings.com.au, this change will reduce the borrowing power of buyers by 5%. Let’s say previously you could borrow $1-million, with the new buffer in place you are likely to be approved for $950,000.

Why did APRA make this change?

APRA is a regulator of the financial services industry. Part of their mandate is to ensure a safe and stable financial system, one where borrowers aren’t being lent more than they can afford to pay back. This step is to maintain that stability, because according to APRA chair Wayne Byres:

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.”

It’s an indication of the tricky economic outlook the pandemic has unleashed on the country, which has added to concerns about household indebtedness.

Who will be affected?

One thing that’s important to note in terms of real estate is that APRA is not trying to influence house prices at all. Prudent mortgage lending is what they’re trying to achieve, ensuring borrowers can pay their debts off in a range of different scenarios.

So this change won’t affect current homeowners and the prices of their properties. But it will affect all borrowers looking for a new home loan, particularly those buying at higher levels of leverage.

What has the reaction been?

Well, the head of Australian economics at ANZ, David Plank, believes more measures could come:

“In the context of the current strength of the housing market this is a modest change. As such, further macroprudential tightening seems more likely than not … APRA’s upcoming information paper on the framework it applies to macroprudential policy will be important in this context.”

The Housing Industry Association meanwhile has not been supportive, believing it will make it harder than ever for renters who aspire to own their own home.

What are your thoughts? If you’d like to chat about them with Henry and get his take on the serviceability buffer changes and how they could affect you, please get in touch! As a leading Brisbane real estate agent Henry has his finger on the pulse of all the latest developments in the industry, and would love to advise on your personal real estate situation.