Home Loan Borrowing Capacity Boosted

GG57 on 05/07/2019 - 13:18

Fairfax news sites are reporting that APRA is changing a rule for all new mortgage customers, where lenders had to assess on the applicant's ability to manage repayments with 7.25% interest rates.

Instead, lenders will be required to assess if customers could manage repayments with rates at least 2.5 percentage points higher than a loan's current rate. I suppose each lender has the option to do their assessment based on a higher figure (more than 2.5 points higher), but this will obviously assist some in obtaining loans from some lenders, and it could increase customer borrowing capacity by ~10%.

Does it also indicate that low interest rates are here to stay?

Financial Home Loan Loan

Comments

  • brendanm on 05/07/2019 - 13:20
    +3

    It indicates that they are desperate to keep people buying property, even if it may be beyond their ability to repay at some point.

    If house prices drop, there are that many people that are mortgaged to the hilt that will then default, banks won't be able to sell the houses for anything near the mortgaged amount, and the whole thing collapses

    • GG57 on 05/07/2019 - 13:28

      Yep, it wasn't that long ago when it last when wrong. Maybe its time to get into the repossession industry.

      I'm not sure if APRA answers to government policy, or is independent, but this seems to be aligned with what the RBA and others want the federal government to do.

    • serpserpserp on 05/07/2019 - 13:30
      +3

      It indicates that they are desperate to keep people buying property

      Who are desperate? APRA? They are the regulators of the banks, they have no interest in that.

      I think what it shows is just a normalization of the low rate environment we are in. It is going to take a pretty long time for retail rates to get back to 7.25% (or ever). The historical averages number is getting lower and lower by the year. Time to keep up.

      • sghetti on 05/07/2019 - 13:55

        Funny that the announcement from APRA came out the Monday/Tuesday after the election…

        Many financial institutions are scrambling to change their affordability calculators (if they haven't already) to conform to the new APRA guidelines. They're desperate to get more sales in, with interest rates coming down, profits are starting to take a hit.

        Source: I work for an FI.

      • brendanm on 05/07/2019 - 16:39
        +1

        They are (from what I can tell) government funded, and one of their aims is to "promote financial system stability".

      • grasstown on 13/07/2019 - 10:52

        Yes they are the regulators, but I can hardly say they have no interest in keeping people buying property. It was very intentional that APRA was kept out of the banking royal commission with no APRA term of reference. We know how much they have failed, allowing banks to get away with what they got away with. There is a whole report on the banks failures, though the report didn’t recommend any substantial reform anyway.

    • devnull73 on 05/07/2019 - 16:27

      This. It's a massive ponzi scheme.

  • mskeggs on 05/07/2019 - 13:30
    +4

    Sad news.
    It isn't in anybody's interest to get a bigger loan.

    • duchy on 05/07/2019 - 14:50

      Wrong. It's in the bank's interest of course.

  • tsunamisurfer on 05/07/2019 - 13:42
    +5

    BORROWERS should themselves be assessing their ability to service a mortgage at 7%. Don't put this on the lenders.

    One major trap most borrowers fall into is assuming that throughout a 30 year obligation, that interest rates will stay at these historic lows, they will not.

    We will unlikely ever go back to the 19% days but 7% (although high) is more reflective of the mean.

    • GG57 on 05/07/2019 - 13:53

      Yes, borrowers should do that.
      But we don't, we let our heart overrule our heads, and we just think that we will manage somehow for the property we want.

      Add to that, what will happen with property values in the future? There must be some that are over-capitalised, and the low interest rates are probably letting them make small inroads in paying off that debt.

  • chumlee on 05/07/2019 - 14:44

    Just means the buffer has changed for lending assessment

  • Seraphin7 on 05/07/2019 - 15:46
    +1

    Does it also indicate that low interest rates are here to stay?

    No. This indicates that APRA are attempting to loosen up borrowing to assist in overall economic performance. If it is successful, this will assist in increasing interest rates over the medium term.

    That said, I believe the interest rate environment will remain benign for anything like the foreseeable future. It wasn't that long ago that 3% was unimaginable. We're now at 1%. It will take quite a significant uptick in the economy to get back to 3%.

  • audz on 12/07/2019 - 15:35

    Surprisingly, ANZ is the first bank to make the move with an email circulation to mortgage brokers late yesterday arvo announcing: "Effective 15 July 2019, ANZ will amend the Floor Rate and Sensitivity Margin used for retail lending. The current ANZ Floor Rate of 7.25% will be amended to 5.50% and the Sensitivity Margin that is currently 2.25% will be changed to 2.50%".

    So, loans are assessed at the higher of either 5.5% floor rate or actual rate + 2.5%.

    Let's see what the other funders do.

    This will indeed allow applicants to borrow more. Previously, an applicant for a loan with an interest rate of 3.5% was assessed at at least double that amount for repayments. So, borrowing power was stifled. At least with this change, it is more realistic. However, it's all about responsible lending and taking actual expenses into account and what the customer can afford (what surpluses do they have). The customer needs to be accountable for their spending and loan repayments.

    This will help many people who could not previously afford to buy a house. It's easy to say that the floor rate should have remained, and that people should just keep saving until they have enough. But statistically if house prices were to keep going up, then it is a never ending race for some. At least with this change, it could help some get their foot in the door.

    1-5 year fixed rates are a reflection that the current low rates are here to stay.

    Feel free to PM me if you need a mortgage broker or just want to "sound things out". I'm happy to give ideas.

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