Lending curbs to impact your next approval
The Australian Prudential Regulation Authority (APRA) has made its move to tighten lending standards and cool our housing market, more specifically, to slow down the rate at which our banks are lending money. Here is what you need to know.
What does this round of 'tighter lending' actually mean?
Our banks apply a buffer when assessing your ability to make future repayments. They apply a higher interest rate to ensure you can withstand higher interest rates, for when they increase in the future (not if). With APRA's most recent announcement, banks will be regulated and forced to increase their buffer on top of the borrowers' interest rates, from 2.5% to 3%.
Some experts believe that this type of change will ensure that interest rates do stay low for longer - well into 2023 or early 2024.
How will it affect me?
This regulatory change or macroprudential change as it's referred to, won't impact existing borrowers or previously approved or settled loans. It will be interesting to see what the actual rollout of this looks like in a few months' time and we will need to see the impacts for new applications, once we plug in each person's individual income, liability, and living expenses. It is perceived by the regulator and after our own quick assessments that there will be a 5% or so detrimental impact on someone's maximum borrowing capacity. So you could be able to borrow 5% less than what you would have been approved for before the changes.
Why is this happening?
As you can see from the graph above, it is clear as to the reasons why this change is happening. The property market has boomed and so too has people's borrowings or household debt levels. We've seen house price growth of roughly 20% this year. We've seen lending or credit growth, rise by 8% this year, and lastly, 22% of home loans written in June 2021 had people borrowing more than 6x their gross annual household income so this should be a sound approach to putting the brakes on this market. A gentle approach as it is being referred to.
Will this change impact my current approval?
Not necessarily. Most banks will honour decisions made up until the change or implementation date. So if you were approved prior to the new implementation date of the new lending rule, your approval is still valid and you can settle. If you've settled already, then there's definitely no change for you. The changes will only apply to new lending as far as we understand. This is not the first time and it's probably not the last we will see of APRA's regulatory changes.
We're not sure how this is going to affect first home buyers who are already struggling to get into the market or even those that are renting and then trying to buy. Will rents increase as a result? Will a fall in first home buyer activity be the unintended consequence? These are a lot of questions we don't have answers for at the minute.
Final thoughts & what's to come
APRA will be monitoring the data very closely. They will be seeing how these regulatory changes play out. APRA has a few more tricks up its sleeve so will be watching debt to income ratios and how much investment lending the banks are writing. If things are looking risky still and these most recent measures aren't having the intended consequences, they will flex their muscles again to further curb how much the banks can lend and impose more restrictions. We will continue to watch this all very closely nevertheless.
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