APRA tightens home loan lending rules, as Aussies take on more debt

The Australian Prudential Regulation Authority (APRA) has tightened rules around home loan lending, in a move that is expected to reduce the maximum borrowing capacity of the average borrower, as Aussies in the housing market take on increasing levels of debt.

Today, APRA wrote to banks, instructing them to increase the “serviceability buffer” that they use to assess home loans.

The buffer is a figure used by banks when they calculate how much they are willing to lend a prospective borrower. It is added to the interest on the loan, in an attempt to give an idea about a borrower’s capacity to repay the loan if interest rates were to rise in the future.

It currently sits at 2.5 percentage points above the interest rate on any product a borrower is applying for, and APRA has instructed banks to raise it by 0.5 percentage points, to a minimum of 3 percentage points by October 31.

Why is APRA tightening borrowing rules now?

APRA Chair Wayne Byres said today that the regulator wants to tighten the rules around lending to ensure the stability of the financial system.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Mr Byres said today.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.”

“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.

In other words, APRA is asking banks to tighten their serviceability criteria, in an effort to minimise the number of home loans given out to people who can’t ultimately afford them.

How is Australia’s housing market looking?

Canstar’s financial expert, Steve Mickenbecker, noted that new home loan lending is booming right now, up nearly 47% from a year ago, while house prices are up around 20%, meaning borrowers are taking on bigger loans. 

“Competitive and still-falling interest rates and the recent moves by two large lenders to reduce their interest-only rates are evidence of just how eager banks are to lend into this boom market,” he said.

“APRA’s move today is forward-looking to account for future interest rate rises down the track. Large loans that may be affordable at today’s rock-bottom rates can become stressed loans when rates are 4% or 5% higher.”

A recent Canstar survey revealed that 57% of Aussies expect house prices to get even higher in the next three months, and in light of rising house prices, APRA has stepped in to try and limit borrowers taking out home loans that they may struggle to afford in years to come.

How will APRA’s move affect the average Aussie home buyers?

According to Canstar Research conducted on October 6, 2021, APRA’s latest lending changes could have the following effects on hypothetical borrowers of various income levels:

• Lower-income borrowers (earning $39,000 annually) could see their borrowing power reduced by $8,000, to $158,000.
• Medium-income borrowers (earning $59,800 annually) could see their borrowing power reduced by $70,000, to $321,000.
• Medium to high-income borrowers (earning $90,500 annually) could see their borrowing power reduced by $30,000, to $548,000.
• High-income borrowers (earning $130,000+ annually) could see their borrowing power reduced by $47,000, to $835,000.

Could this be a boon for first home buyers?

“APRA is tackling stability rather than housing prices, but it must also be hoping that lower lending volumes may dampen housing prices,” said Mr Mickenbecker.

“First home buyers whose income is stretched by repayments will inevitably find it tougher to get into the market, but the move does no damage to first home buyers’ ability to save a deposit, which is historically a major pain point.”

Mr Mickenbecker added that investors who ‘ration’ equity across multiple loans may be more impacted by the coming changes, with lenders required to factor in the increased buffer against existing loans when assessing serviceability for any new application.

This may ultimately be an advantage for first home buyers if it means the market becomes less crowded, but there may be more changes to come.

“The increase in the buffer is a start from APRA, but further measures would not surprise if the market booms after lockdown as many expect,” Mr Mickenbecker said.

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