The Australian Prudential Regulation Authority (APRA) has announced that future property buyers will have to prove that they can repay their mortgage if rates rise by 3%.
Typically when you apply for a home loan, your lender stress tests your ability to meet loan repayments (also known as home loan serviceability) at a higher rate. This is to make sure that you don’t default on your loan if interest rates go up.
The new APRA rule increased the standard stress test by 50 basis points, and lenders are expected to increase their own tests by the same number of points.
The rule will reduce how much you can borrow by about 5%, which means if you have an annual income of $150,000, your borrowing power falls by about $46,000.
Here's what Savings.com.au said about the new APRA regulation...
What does it mean for the average home loan?
For new loans, it will probably mean you can borrow less money.
APRA estimates it will drop borrowing power by 5%. On a $400,000 home loan under the old rules, that could drop your borrowing power to $380,000.
Say you have a 2.00% home loan - the new buffer of 3.0% means banks could assess your ability to repay based on a 5.00% interest rate.
On a $400,000 home loan over 30 years, that would result in a monthly payment of $2,147 per month.
Frankly, that repayment sounds pretty high, especially in today's low-interest environment.
Does it affect existing home loans?
Existing home loans are likely to be less affected or even unaffected by the changes because the bank has already assessed your ability to pay off the home loan satisfactorily.
However, where existing homeowners could run into a bit of strife is when it comes to refinancing. Any refinancing will likely be assessed with the new buffer in mind.
Though with the way house prices have performed, many homeowners would have likely experienced strong capital growth and hence built up sizeable equity, which takes some of the stings out of refinancing.
What if I'm a first home buyer?
First home buyers may now have a harder time borrowing as much as they might have done in the past, or satisfying the bank they can even get a home loan.
However, if lending, wages, and debt-to-income data is anything to go by, most homebuyers don't totally over-leverage themselves, so the 50 basis point rise in the buffer might not totally be the end of the world.
You might just have to temper your expectations a touch, especially if you're in Sydney or Melbourne with high home prices.
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