New Home Loan Rules Make Borrowing Tougher

The Australian Prudential Regulation Authority (APRA) recently increased the minimum interest rate buffer on home loan applications, from 2.5 to 3 percentage points.

Residential real estate values have jumped 20.3 percent in last 12 months, and the restrictive move has arisen amidst concerns over the number of buyers borrowing over six-times their pre-tax income.

APRA chairman Wayne Byres  says the intention of the new home loan rule is to head off building risks, from a growing number of very large mortgages. The buffer essentially provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses. Important to note though, that the new directive will not have any impact on current mortgage interest rates.

Under current rules, banks apply a 2.5 percent buffer on top of whatever interest rate they are advertising, when assessing whether you can afford to take out a mortgage.

From 1 November 2021, banks must now apply tougher criteria when determining a borrower’s ability to service mortgage repayments. This assessment rate change could reduce your maximum borrowing capacity by 5 percent, or potentially tens of thousands of dollars.

Designed to protect individuals from taking on risky levels of debt,  the change is likely to affect first home buyers, who typically have smaller incomes and deposits.

Under the old regime, if the maximum an individual could borrow was $500,000; the full capacity they will be able to borrow under the new rules, will be $475,000.

To find out how these changes may alter your personal situation, and how you could potentially prepare to mitigate, contact us today!