APRA’s new mortgage rule: what it means for borrowers

Australia’s banking regulator has tightened the screws on mortgage rules potentially affecting many borrowers. Here’s what you need to know.

A hot housing market has dramatically increased mortgage sizes.

Australia’s banking regulator has tightened the screws on banks and borrowers in an effort to rein in the lending boom associated with surging house prices.

An increase in the interest rate buffer for mortgage serviceability, from 2.5 per cent to 3 per cent, was announced Wednesday by the Australian Prudential Regulation Authority (APRA).

It’s designed to “reinforce the stability of the financial system”, APRA says. Here’s what it all means.

WHAT’S HAPPENED AND WHY?

The interest rate buffer is a figure APRA expects banks to use to assess a borrower’s ability to meet their future mortgage repayments.

If, for example, you apply for a mortgage with an interest rate of 2.5 per cent, the bank must now assess that you will still be able to make repayments if the rate rises to 5.5 per cent – rather than the previous serviceability assumption of 5 per cent.

Mortgage sizes have surged amid huge house price increases, with many borrowers taking out loans at six times their annual income – which is historically high. APRA expects the high level of household indebtedness to continue.

WHAT DOES IT MEAN?

You won’t be able to borrow as much money. APRA says increasing the buffer will reduce the maximum borrowing capacity of a typical borrower by about 5 per cent.

The change impacts people buying a home or refinancing, and is expected to hit property investors harder because they typically borrow more.

Nobody expects interest rates to rise 3 per cent any time soon, and the Reserve Bank says it doesn’t expect a rise before 2024, so the new APRA measure is more of a deterrent and safety valve to help cool hot-headed borrowers.

CAN I STILL GET A LOAN?

Generally, yes. But if you’re already a borderline lending proposition for a bank, probably no.

Many people don’t borrow to the hilt, so they are unlikely to be affected, and APRA says the impact on home loans nationally is likely to be modest.

HOW HAS THE SECTOR REACTED?

Pretty positively. The move is seen as prudent, and perhaps not the last step in controlling housing price heat.

KPMG chief economist Brendan Rynne says it will “certainly calm the housing market”.

The Property Council of Australia says it “understands the rationale” but wants APRA to avoid taking further action until 2022 so it can monitor the impacts.

RateCity research director Sally Tindall says the changes “will hurt first home buyers who typically have smaller incomes and deposits” but will help stop people from overstretching themselves.

Canstar’s Steve Mickenbecker says further measures will not be surprising in the market booms after lockdowns end.

Originally published as APRA’s new mortgage rule: what it means for borrowers