ANALYSIS: APRA’s bump in the serviceability pad might mean you can’t borrow as much money as before.
A colleague told me that the hype around Wednesday’s news is likely to cause a bigger stir in the real estate market than the actual APRA announcement itself.
Indeed, the increase of the so-called “serviceability buffer” from 2.5% to 3.0% hardly seems to be a big problem, but the prudential regulator estimates that it will reduce the borrowing capacity of the average borrower about 5%.
So let’s clear up a few things.
What is a maintenance pad?
A bank will not only look at payslips, bank statements, savings, and your existing debt – it will also do some “quick math” to see if you can still afford to pay off your mortgage if interest rates rise. considerably.
Banks perform this assessment using a “service rate,” which is essentially a higher hypothetical interest rate that banks use to judge your ability to meet repayments.
A service rate can be one of two things: the bank’s minimum “floor” rate or the advertised interest rate for home loans plus a “buffer”. Whichever is higher will generally be used as the service rate.
As of 2019, banks can set their own lows – typically around 5% – while APRA’s new buffer recommended is 3.0% above the advertised rate.
The buffer is to make sure that you can not only afford the advertised interest rate, but also resist any potential rate hikes.
If we look at the example of the Commonwealth Bank below, its June 21 “minimum floor” (5.25% pa) is actually lower than its standard variable rate (4.55%) plus the previous cushion of 2 , 5% of APRA.
In this case, a client requesting a Commbank loan at the standard variable rate of 4.55% pa would be evaluated at a viability rate of 7.05% (4.55% + 2.5% buffer), because it is higher than the floor rate. by 5.25%.
Under APRA’s largest buffer of 3%, this service rate would be even higher at 7.55%.
What does this mean for the average home loan?
For new loans, this will likely mean that you will be able to borrow less money.
APRA estimates that it will reduce its borrowing power by 5%. On a home loan of $ 400,000 under the old rules, that could drop your borrowing power to $ 380,000.
Suppose you have a 2.00% home loan – the new 3.0% cushion means that banks could estimate your repayment capacity based on an interest rate of 5.00%.
On a home loan of $ 400,000 over 30 years, that would translate into a monthly payment of $ 2,147 per month.
Frankly, this repayment seems quite high, especially in the current low interest rate environment.
Does this affect existing home loans?
Once you’ve stepped in the nightclub door and past the thick-necked bouncer, you’re pretty much free to grab a drink.
Existing home loans are likely to be less affected, if not unaffected by the changes, as the bank has already assessed your ability to repay the home loan satisfactorily.
However, where existing home owners might run into a bit of a conflict is when it comes to refinancing.
Any refinancing will likely be assessed taking into account the new cushion.
However, given the performance of house prices, many homeowners would likely have experienced strong capital growth and therefore accumulated significant equity, which would alleviate some refinancing.
What if I am a first-time buyer?
First-time homebuyers may now have a harder time borrowing as much as they might have in the past, or satisfying the bank that they can even get a home loan.
As a first-time homebuyer, you are the young thug in the nightclub queue wearing sneakers at a fancy club.
“No coaches!” said the bouncer.
Your deposit may earn you less than before.
However, based on data on loans, wages, and debt-to-income ratio, most homebuyers are not fully indebted, so the 50-point increase in cushion base might not be totally the end of the world. .
You may need to temper your expectations a bit, especially if you are in Sydney or Melbourne with very high prices.
Would this really help the affordability of housing?
In the grand scheme of things, this is a pretty minor adjustment. Thinking back to what my colleague said yesterday, the hype around the announcement is probably more influential than the change itself.
However, APRA said it is looking at other levers it can use to promote financial stability, which could collectively chill the housing market.
The main criticism, however, is that this leverage does not really promote “affordability”, but rather disintegrates “affordability”, especially for first-time buyers who naturally borrow more the first time to enter the market.
Investors and homeowners already in the market will be less affected as they can use the equity in their existing home to fuel any subsequent home purchases.
While APRA has said the latest change is designed to cool investment lending and promote financial stability, the majority of the loan surge in 2021 has been for first-time home buyers and homeowners.
However, there has been a slight decline in lending to these demographics as a natural reaction to the surge in house prices.
A funny anecdote to finish
New Zealand has generally gone much further on the issue of housing affordability.
Ahead of the Reserve Bank investment lending crunch in March this year, CoreLogic NZ figures for January show that 30% of all new loans this month went to investors – a 15-year high.
Investors crowded in before the changes took effect.
It looks like any impending legislation could push demand forward before scaring the market.
Affordability, or at least affordability, for first-time home buyers may get worse before it “gets better” – if at all.
Buying a home or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.
|Rate type||Gap||Redraw||Ongoing charges||The initial costs||LVR||Lump sum reimbursement||Additional refunds||Pre-approval|
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Smart Booster real estate loan at variable discount rate – 2 years (LVR
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Low rate home loan – Premium (principal and interest) (owner occupied) (LVR
|FEATUREDEARN YOUR INTEREST-FREE HOME LOAN|
Nano Home Loans Variable Owner Busy, Principal and Interest (Refinancing Only)
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Owner Occupant Accelerate – Celebrate (LVR
Owner Occupant Accelerate – Celebrate (LVR
|FEATUREDEASY ONLINE REQUEST|
Garden mortgage (principal and interest) (special) (LVR
- Fast turnaround times, can meet a 30 day settlement
- For purchase and refinancing, minimum deposit of 20%
- No ongoing or monthly fees, add compensation for 0.10%
Image by Bailey Rytenskild on Unsplash
The entire market was not taken into account in the selection of the above products. Instead, a smaller part of the market has been envisioned, which includes the retail products of at least the Big Four Banks, the Top 10 Customer-Owned Institutions and Australia’s largest non-banks:
Products from some vendors may not be available in all states. To be taken into account, the product and the price must be clearly published on the website of the supplier of the product.
In the interest of full disclosure, Savings.com.au, Performance Drive, and Loans.com.au are part of the Firstmac group of companies. To learn more about how Savings.com.au handles potential conflicts of interest, as well as how we are paid, please click on the links on the website.
*Comparison rate is based on a loan of $ 150,000 over 25 years. Please note that the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as draw charges and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.