Changes to APRA guidelines herald good news for home buyers

Market Insights
5 years ago
2 minutes

If you’re looking to take out a home loan, you’re in luck. The Australian Prudential Regulation Authority (APRA) is looking at lifting some guidelines which will make it easier to secure a loan, by lowering the rate at which they assess a borrower’s capability to repay their loan.

If you’re a homebuyer looking to borrow at an interest rate of, for example, 3.9 per cent, you are assessed on your ability to repay the mortgage at a rate of 7.25 per cent. If APRA lifts the rule, you would be assessed on your ability to repay at a lower 6.4 per cent, according to CoreLogic.

Once the rule is lifted, banks and lenders can set their own rates, as long as they retain a 2.5 per cent buffer. This would be a welcome change as the banks had tightened lending regulations in the past two years, making it harder for home purchasers to borrow enough to cover a mortgage.

Originally introduced in 2014, APRA’s key constraints on mortgage credit meant banks had to test prospective borrowers against either an interest rate ‘floor’ of 7 per cent or by a buffer of at least 2 per cent buffer over the loan rate.

The rate of most mortgages today is less than 4 per cent. APRA’s Chairman Wayne Byres has said the gap between the 7 per cent ‘floor’ and actual rates paid has become unnecessarily wide in some cases.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential standards at a time of heightened risk,” Byres said. Although many of those risk factors remain, he said, the recent evolutions in the property market have led APRA to review whether the interest rate floor remains relevant.

“In addition, the introduction of differential pricing in recent years — with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other — has meant that the merits of a single floor rate across all products have been substantially reduced,” Byres explained.

“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards. Rather, it is simply a recognition that the current interest rate environment does not warrant a uniform mandated interest floor rate of 7 per cent across all loans.”

In addition to this, the Reserve Bank Australia is likely to lower interest rates at its next meeting in June and other lending institutions often follow suit. This combination of loosening lending restrictions and a cut in interest rates creates the perfect market for home buyers.

Read our tips for buying in a fluctuating property market here.