There’s a been a lot in the news recently about the policy changes signalled by APRA, and what this could mean for Australian home buyers. It can all get a bit confusing, so in this blog post we break it down and make it easier to understand. Let’s kick it off by asking:
What is APRA?
APRA stands for Australian Prudential Regulation Authority. They’re an independent authority who regulate Authorised Deposit Taking Institutions, referred to as ADI’s, which include banks, building societies, credit unions and similar institutions. According to their website they:
“use a broad range of tools to supervise financial institutions and promote the stability of the broader financial system.”
APRA’s Last Policy Change
Let’s rewind to three years ago. What APRA did then was make a change enforcing ADI’s to assess mortgage applications at a higher interest rate than the one that currently prevailed. This means that if interest rates went up, the borrower would still be in a financial position to cover the repayments.
The minimum assessment floor rate APRA enforced was 7%. This means, if you applied for a home loan, the ADI you borrowed from would need to determine whether you could make repayments at a rate of 7%, even if the actual interest rate was lower.
APRA’s Proposed New Policy Changes
Back to the present, and APRA has just signalled that they intend to remove the 7% floor rate on mortgage applications. A statement from the regulator said:
“APRA has proposed removing its guidance that [lenders] should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7%. Instead, [lenders] would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.”
Australia is currently enjoying historically low interest rates, so often the gap between what was actually being paid by borrowers and what they were being assessed on was pretty large. What APRA is doing now is giving ADI’s the chance to make their own interest floor, one that is 2.5% above the actual rate of lending. An example would be if you wish to take on a mortgage at a rate of 3.5%, you’ll need to prove you can afford repayments at 6% (3.5 plus 2.5%).
What Does This Mean for Home Buyers?
These relaxed serviceability assessments means home buyers will be able to borrow more when they buy real estate. If in the past an assessment rate of 7% would provide you with a maximum loan amount of $600,000, a decreased rate of assessment would mean you could borrow a higher sum.
The changes theoretically will mean more Australians will be able to get a mortgage, as the financial barriers to entry will be lower. Will this result in a huge bump in real estate purchases? We’ll have to wait and see. The banks are likely to tighten up on other criteria when they’re approving mortgages, so whether these proposed APRA policy changes make a huge difference, we’ll have to wait and see.
If you have any questions about the APRA policy changes and how they’ll affect the real estate market, I’ll be glad to answer them for you. Contact me, Henry Wong, on 0412471588.
