APRA removes 7pc home loan rule

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IN a bid to kickstart the ailing housing market, the Australian Prudential Regulation Authority will remove the minimum 7% interest rate on home loans guidelines, which will allow homebuyers to borrow significantly more, an average of $60,000 per household.

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards.

The common industry practice has been to use a rate of 7.25%, however given that the Reserve Bank recently cut interest rates to a record low of 1%, is expected to reduce it to 0.5% by February next year, APRA has scrapped its 7% rule.

Instead, lenders will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5% interest rate.

Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,”

But Byres warns that the changes are not intended to signal any weakening in lending standards.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors.

“This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments,” Byres said.

RateCity research director Sally Tindall said for many Australians the move is likely to significantly boost their borrowing power by tens of thousands of dollars.

Ratecity analysis shows a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25% instead of 7.25%.

The average single person would be able to borrow up to around $50,000 more under the same scenario.

Estimate of home loan borrowing capacity under new rules

Scenario 1: single income ($83,455)

Serviceability rate Estimated borrowing amount Potential increase in borrowing power
7.25% – current $478,000  
6.50% $516,000 $38,000
6.25% $529,000 $51,000
6.00% $544,000 $66,000

Scenario 2: family of four (household income $109,688)

Serviceability rate Estimated borrowing amount Potential increase in borrowing power
7.25% – current $559,000  
6.50% $603,000 $44,000
6.25% $619,000 $60,000
6.00% $636,000 $77,000

Assumptions: Average household income data according to ABS Census 2015/2016. Assumes one parent earning 30% of $109,688 and the other 70%. Assumes monthly household expenses of $3500.

Single income figure from ABS Average Weekly earnings Nov 2018, Full-time adult average weekly ordinary time earnings. Assumes monthly expenses of $2000

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