home lending requirements

Will lending requirements get tighter?

As almost every homebuyer in Victoria will tell you, the past year or so has been a tough time to try and secure your next home. The ongoing shortage of available properties for sale and the strong competition from other buyers certainly been challenging, but as you may have seen in the news this week, there’s a new factor in the market that could make life more complicated for buyers, particularly those who were considering delaying their purchase.

As you may have read, the Australian Prudential Regulation Authority (APRA) announced this week that banks will be forced to use a slightly higher ‘assumed interest rate’ when assessing applications for home loans from new customers.

Under these new rules, banks will be required to test whether new customers could manage their repayments at an interest rate 3 percentage points higher than the actual rate on the loan. Prior to this change, banks were added 2.5 percentage points – known as a ‘‘serviceability buffer’’ – onto the interest rate of the loan when assessing a customer’s application. The change is expected to reduce a new customer’s borrowing capacity by about 5 per cent.

This move came as no surprise to those of us who watch the home loan market closely. As recently as last week the Federal Treasurer, Josh Frydenberg, confirmed that surging house prices were a key topic of discussion at the most recent meeting of Australia’s Council of Financial Regulators.

Over the past year the typical Australian home has increased in value by more than 18 per cent, with record low interest rates fuelling increased debt levels. In fact, the total value of monthly home loan approvals, excluding the refinancing of existing loans, has jumped by more than two-thirds over the past year alone, despite the impact of the pandemic.

Mr Frydenberg was quoted as saying, “Carefully targeted and timely adjustments are sometimes necessary. There are a range of tools available to APRA to deliver this outcome.”

The reason that this is important is that many economic commentators believe that this move by APRA is probably only the first step, with further tightening measures to come. If you have a mortgage on your current home, and you’re not planning on moving, then a tightening of lending requirements is unlikely to affect you. However, if you are a first home buyer who has pre-approval for a mortgage, or you are planning on upgrading your home which will involve refinancing in order to fund your purchase, then there is a strong argument for making your move sooner rather than later.

Clearly, none of us can be sure what APRA may do, but there’s a lot to be said for “the bird in the hand approach” when current lending conditions are so favourable for borrowers.

Don’t forget, having an experienced and objective Advocate by your side throughout the process can make all the difference to obtaining the right property at the right price in a shorter time frame.  So why not give the team at Ian Reid Buyer and Vendor Advocates a call this week on 9430 0000 to talk about your options?

And don’t forget, if you’re going to be selling you’ll find plenty of helpful insights in our free booklet, “Fatal Real Estate Traps Exposed”