APRA’s new mortgage lending measures explained
How does it change?
APRA said it would increase the buffer by 0.50 percentage point, from 2.5 to 3 percent. We must now add 3% to the rate of the product offered by the bank.
The APRA does not, at this stage, oblige the banks to modify their floor rate.
The impact of the higher buffer – and its interaction with the floor – can be understood by looking at the Commonwealth Bank. It has a basic standard variable rate of 2.69 percent.
The floor rate set by the ABC is 5.25 percent. Before Wednesday’s changes, he would have valued a borrower paying that standard variable rate at the floor rate of 5.25 percent (because it’s higher than the 2.69 percent plus the old 2.5 percent cushion, which equivalent to 5.19 percent).
However, after the changes, this borrower will now be valued at 5.69%, which is 2.69% plus the new 3% cushion, which is now above the floor.
How will the 50bp increase in the buffer affect average borrowing capacity?
APRA said its increase in the cushion would reduce a typical client’s borrowing capacity by 5 percent. This means that if you could previously borrow $ 1 million, now you will be able to borrow $ 950,000.
However, not all customers borrow at full capacity. In fact, at CBA, only 8% of mortgage applicants borrowed at full capacity during the first half of the year. This means that the new cushion will not impact many borrowers.
According to RateCity’s calculations using ABC’s serviceability calculator, the maximum borrowing capacity of an average family could drop by $ 35,025 under the new cushion. This assumes that one adult works full time and the other part time, and that they have two dependent children.
A single person with an average income of just over $ 90,000 will be allowed to borrow about $ 28,515 less under the new rules.
The average home loan in Australia is around $ 728,500 as of December 2020, according to the Australian Bureau of Statistics. A 5% reduction in borrowing capacity would bring it down to $ 692,075, which would reduce the average mortgage loan by $ 36,425.
What else could come?
APRA should use additional tools to limit bank lending if high levels of lending to indebted borrowers continue despite its higher cushion.
Another option is a debt-to-income ratio cap, which could limit the number of new loans with a debt-to-income ratio of six times or more. This could prevent borrowers from getting into debt at risky levels and restrict investors who buy multiple properties. But that could create a barrier for first-time buyers unless exemptions are granted.
It could also increase the “floor” rate used for health assessments, as described above. The average floor rate for the Big Four is 5.09%, according to RateCity. Raising it to, say, 6% could see borrowers valued at that rate, which would increase the new buffer rate, further reducing borrowing capacity.
APRA could also review investor loan limits, which limit the number of loans that can go to real estate investors compared to homeowners. This was imposed between December 2014 and April 2018, when APRA limited banks to 10% growth in investor loan portfolios. This has reduced the number of investors competing with first-time buyers and other homeowners, but has had limited success in cooling house prices.
Another tool used in recent years is the interest-only loan cap, which limits the number of new loans for which borrowers only repay interest, which is popular with investors seeking the benefits of effective tax breaks. negative leverage. Between March 2017 and December 2018, banks were required to limit lending at interest only to 30% of new loans, which reduced the number of investors active in the market.
Limits on loan-to-value ratios are another option and have been implemented in New Zealand, where prices in Auckland are also booming. This limits the number of new loans with small deposits. But they could unfairly target first-time buyers, who struggle to save for deposits given low savings rates, unless exemptions are granted.
APRA may also decide to introduce a combination of these tools, all of which will be discussed in a future document. It will also consider whether to use the new powers given to it in 2017 to subject non-bank lenders to lending rules.