Bank regulator, the Australian Prudential Regulation Authority (APRA), has imposed tighter serviceability tests on home loan borrowers, but several property specialists believe Australian real estate will continue its record charge.

APRA has told the mortgage lenders that they will need to check if borrowers would still meet their home loan repayments even if rates rose to almost double current levels.

Before APRA’s announcement effective 6 October, banks were required to check if borrowers could still meet their loan repayments even if market interest rates rose 2.5% above current levels. That ‘stress test’ benchmark has now increased to 3.0%[i]. 

In a nutshell, the changes mean that when home buyers apply for a mortgage with an interest rate of 2.5%, the bank must check if they could handle loan repayments if the rate jumped to 5.5%. 

APRA Chair Wayne Byres said, “In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future. 

“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. With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” he said.

What does it mean for your home buying plans?

Craig Betalli, Senior Finance Broker at Our Broker, said that while the new APRA test may create some limitations on borrowing, he doesn’t expect a dramatic impact. “Most borrowers are already limited by debt-to-income ratios (DTI) of 6 to 7 times their income,” Craig said. 

“We usually find that borrowers will have a surplus after servicing their mortgage debts as they are restricted by DTI calculations already.”

According to Craig, “The reality is we are heading into a strong period of spending, investment, and growth, and while the servicing might be a bit tighter, interest rates haven’t changed. 

“APRA’s increase in banks’ serviceability tests may mean some home buyers need to review their buying budget, and this could boost demand for homes in the lower to mid-price brackets. Though, it’s a case of ‘time will tell’ about the impact of the changes on demand for property, especially as the economy shakes off the impact of COVID-19 restrictions and lockdowns.”

Property prices to certain to power on 

Angus Raine, Executive Chairman Raine & Horne, “One thing that is certain is that residential property continues to be an outstanding investment for Australian households.”

As evidence of this, home values have notched up record gains – climbing 20.3% nationally in the past 12 months[ii].  “In Sydney, the median property value has skyrocketed by 23.6% to $1.056 million over the last 12 months,” Angus said. “In some cases, we are seeing vendors making upwards of $1 million above the reserve at auctions, which is fantastic.

“These results are testimony to the enduring value of residential real estate as the best investments many Australians will ever make.”  

If you’re in the market for a new home or investment property, APRA’s recent decision makes it essential that you contact Our Broker for an update on your borrowing capacity, Angus insisted. 

“That said, in the last couple of booms. APRA has become a surrogate RBA controlling lending criteria. However, the market is so deep with multiple buyers, whereas there was a handful of buyers in the past. So, the new restrictions should have minimal impact on buyer confidence.”

If you feel APRA’s new requirements impact your buying budget, contact Our Broker on 1800 913 677 to work through your options. 

[i] https://www.apra.gov.au/news-and-publications/apra-increases-banks%E2%80%99-loan-serviceability-expectations-to-counter-rising

[ii] https://www.corelogic.com.au/sites/default/files/2021-09/211001_CoreLogic_HomeValueIndex_Oct21_FINAL.pdf