Finally, there is a glimmer of hope on the horizon for home loan borrowing.
The Australian Prudential Regulation Authority (APRA) announced on Friday 5 July it would authorise the banks to lower the stress test for home loans.
To be specific, this decision will increase the borrowing power for anyone applying for a home loan. Investment bank UBS believes the combination of APRA’s announcement, along with the Reserve Bank of Australia’s (RBA) recent interest rate cuts, provides a 14.0% benefit to borrowers applying for a home loan.
This is particularly exciting news for Perth, where frustrations are at boiling point. Thankfully, APRA’s announcement will slightly ease near-impossible lending criteria and provide stimulus for first home buyers, investors and refinancers
A number of these frustrations were highlighted in my blog from August last year titled – “Mortgage Prisoners – The Real Cost of Tighter Lending Criteria” – which proved popular because it resonated with a large sector of homeowners.
So APRA’s announcement couldn’t have come at a better time.
This APRA announcement came on the same day as the Government passing $158 billion worth of personal income tax cuts through parliament, providing a boost to economic growth. Add in the RBA’s interest rate cuts, which now sees the cash rate at a record low of 1.0%, and our economy is finally getting much-needed stimulus.
However, many are asking how we found ourselves in these perilous economic times in the first place. Political point-scoring brought on a self-imposed credit crunch which has unnecessarily put our economy into a position of vulnerability.
The Royal Commission into Banking and Financial Services did little, aside from hit the banks with a feather and impose unnecessary restrictions on the Australian public and business, denying them access to credit.
This has led to stagnant wage growth, anaemic inflation, rising unemployment (particularly in WA), low consumer and business confidence and a weakening housing market (once again, particularly in WA).
Thankfully the Government, the RBA and the banking regulators, and even Labor, are finally working in lockstep together for the greater good of the country. In that, APRA’s announcement is an outstanding opportunity for first homeowners and investors as well as people looking to refinance to a better interest rate.
Change to Stress Test
Previous to this announcement, since 2014, APRA required banks to use a minimum assessment rate of 7.0% when assessing home loan applications. Common practice for most banks was to go a step further, setting assessment rates at 7.25%. Others went further again with ING, for example, using an assessment rate at 8.0%.
As a result of APRA’s announcement banks will now be able to set their own minimum interest rate floor for use in serviceability assessments.
According to the ABC’s business writer, David Chau, the only restriction to this is banks must use a buffer of at least 2.5 percentage points over the loan’s actual interest rate.
“With many banks now offering variable mortgage rates in the low-3s, that means many borrowers are likely to be tested at a rate below 6 per cent per annum as banks decide whether they can afford to repay their loan” Chau said in an article for the ABC.
APRA’s announcement summed up the current situation whereby the assessment rate of 7.0+% was out of touch with actual interest rates in the current market. Most people are now enjoying interest rates in the low-3’s to low-4’s based on the bank’s interest rate margin of 2% to 3% on top of the record low cash rate of 1.0%.
“In the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs [Australian deposit-taking institutions] to maintain sound lending standards,” APRA’s chairman Wayne Byers said.
At Ocean Edge Finance we are excited at this announcement as we can now reassess our clients who previously narrowly missed out on a home loan. These include first home buyers, investors and numerous refinancers (who we refer to as mortgage prisoners), because their income capacity did not meet assessment criteria based on a 7.0+% assessment rate.
In my mortgage prisoner blog, Mortgage Prisoners – the real cost of tighter lending criteria I wrote the following: “It’s heartbreaking delivering the news to our clients they are trapped with their current interest rate for the foreseeable future despite their excellent credit history.” This APRA announcement will now open the door to many.
According to comparison website RateCity, a family, earning a household income of $109,688, would be able to borrow up to $60,000 more, if their loan was assessed at 6.25 per cent instead of 7.25 per cent. A single person, who finds themselves in the same scenario, may be able to borrow an extra $50,000.
High Standards Remain
Naturally, in their announcement APRA reminded the banks this was not a licence to relax lending standards.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” APRA’s chairman Wayne Byers said.
Couple this with ongoing tightening of living expenses as well as the rollout of comprehensive credit reporting we at Ocean Edge Finance won’t go as far as to say home loan applications from here on in will be a walk in the park. But this is definitely a move in the right direction.
Beware the Naysayers
To finish, it’s important to note there have been some sections of the media who are not amused by APRA’s decision, sighting irresponsible the prospect of larger mortgages at a time when Australia sits atop the world in debt to income ratio. This negative attitude could put brokers and bankers firmly in the firing line with allegations of potentially using APRA’s decision to exploit borrowers.
Rest assured, at Ocean Edge Finance, all we care about is assisting our clients to achieve the best outcome for their needs. This APRA decision will go some way to making it easier for us to do just that.
The Final Word
If you would like to talk more about APRA’s announcement, or anything at all to do with home loans, or any type of loan, don’t hesitate to reach out and we’d be delighted to discuss your needs further.
Feel free to call us on (08) 9319 2850, email us at email@example.com or drop into our office at Unit 2 / 8 Silas Street, East Fremantle.