First home buyers ‘caught in the middle’ as regulator moves to slow bank lending
When Bronte Oldfield and Phil Grooby heard that it will soon become harder for some borrowers to get a mortgage, they did some quick calculations.
They’d been searching hard for their first property for the last few months, and had been watching prices run ahead of them.
But this week, the financial regulator said banks would have to start demonstrating, from next month, that new borrowers were capable of making mortgage repayments if home loan interest rates rose 3 percentage points above their current rate.
At the moment, the minimum interest rate buffer on home loan applications is 2.5 percentage points.
It was a tentative step by the regulator to cool credit growth around the country, after having watched property prices surge more than 20 per cent in the last 12 months.
The regulator estimates the small rule change will reduce a household’s “maximum borrowing capacity” by around 5 per cent.
But Ms Oldfield and Mr Grooby say that 5 per cent difference is bigger than it sounds.
“When you factor in how prices in different areas have gone up 20 per cent in the last year, plus you take 5 per cent off what you can borrow, now you’re looking at a 20 to 25 per cent increase in the last year,” Mr Grooby told the ABC.
“We’ve been caught in the middle,” Ms Oldfield said.
“They’ve kind of cut us off and we can’t actually keep up anymore, it’s out of our control.
“I think our smart decision is going to be … to wait and see what the effect of this cut is.”
On Wednesday, the Australian Prudential Regulation Authority (APRA) sent a letter to major banks saying it was increasing the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points.
From November 1, banks will have to test if new borrowers can still afford their mortgage repayments if home loan interest rates rise to be 3 percentage points above their current rate.
In other words, if you apply for a mortgage with an interest rate of 2 per cent on November 1, the bank will have to test to see if you can afford to make repayments with a 5 per cent interest rate.
If you can not, the loan application will be denied.
If the banks do not use this higher test, they will be financially penalised by having to hold more reserves against losses, which will reduce their profitability.
In practice, it means all regulated institutions will use the minimum 3 percentage-point buffer.
For home loan applicants, it also means the maximum amount people can borrow relative to their income and expenses will be lower than it was under the current serviceability test of 2.5 per cent.
APRA chairman Wayne Byres says the move was intended to head off building risks from a growing number of very large mortgages.
But it’s worrying some would-be home buyers.
Caught in a pinch
Morgan Neaves says she only recently exchanged contracts on a property and she’s desperately hoping her contract goes through before the end of this month.
“If the bank starts using that 3 per cent now then it is quite possible that loan could be rejected,” she told the ABC.
She’s worried if she misses out this month she’ll miss the boat for properties in her area, because she’s been searching actively for 12 months and it’s been a slog.
“A lot of the time the investors will come in and they’ll outbid you by $40,000, $50,000,” she said.
“If [house prices] accelerated another 5 or 10 per cent it’d be out of our reach.
“We would possibly have to look at maybe leaving the area to be able to afford to buy a house, which is extremely daunting because our family is here. I have a young son, he’s in school.”
How much will people be able to borrow?
APRA estimates a typical household’s maximum borrowing capacity will drop by 5 per cent.
Under the old rules, if the maximum someone could borrow was $500,000, the maximum they’ll be able to borrow under the new rules will be $475,000.
However, plenty of borrowers don’t borrow at their full capacity, so the changes may not affect them.
Analysts at RateCity.com.au estimate the average family’s maximum borrowing capacity could drop by $35,025 under the new rules.
That figure of $35,025 assumes one adult is working full time and the other is working part time, with two dependent children, and it’s based on Commonwealth Bank’s serviceability calculator on a fixed rate.
A single person on the average income will be able to borrow roughly $28,515 less under the new rules.
“These changes will clip the wings of people borrowing at their capacity,” RateCity.com.au research director Sally Tindall said.
“Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want.
“The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first home buyers who typically have smaller incomes and deposits,” she said.
Will you be caught out by the changes?
APRA told banks to prepare for the changes to begin on November 1, but it didn’t tell banks how to make the transition.
Different banks will have their own way of doing things, so customers will have to talk to their banks and mortgage brokers to find out how they’ll be affected.
For example, Commonwealth Bank says any customers that already have pre-approval will be honoured, and customers that have exchanged but not settled will be honoured, but new borrowers coming to the bank now will face the new restriction.
CBA chief executive Matt Comyn has welcomed the move from APRA.
“We believe that APRA’s announcement to increase the serviceability floor is a sensible and appropriate step to help take some of the heat out of the housing market,” he said in a statement.
“Having increased our floor to 5.25 per cent in June we think this further step will provide additional comfort for borrowers and is a prudent measure for lenders.”
Housing risks mounting in Australia
APRA chairman Wayne Byres said the decision to reduce the maximum borrowing capacity of borrowers was intended to head off building risks from a growing number of very large mortgages.
“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,” he noted.
“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.”
And the move to test borrowers at higher interest rates appeared timely given recent official interest rate increases overseas.
On Wednesday, the Reserve Bank of New Zealand became the latest central bank to raise rates, lifting its benchmark from a record low 0.25 per cent to 0.5 per cent.
Its move came on the back of rising inflation pressures and the nation’s own housing boom, which has seen prices surge around 30 per cent over the past year, despite moves earlier this year to contain them.
Despite its ongoing COVID outbreak, it has joined South Korea and Norway as the developed economies that have started moving interest rates away from pandemic lows.
In its post-meeting statement, the RBNZ’s monetary policy committee warned “the level of house prices is currently unsustainable.”
“Members noted that a number of factors are expected to constrain house prices over the medium term. These include a high rate of house building, slower population growth, changes to tax settings, and tighter bank lending rules,” the statement continued.
“Rising mortgage interest rates, as monetary stimulus is reduced, would also constrain house prices to a more sustainable level.
First home buyers waiting and watching
Bronte Oldfield and Phil Grooby are still hoping to find a home on Sydney’s northern beaches where they grew up.
They said one of the harder lessons they’d learned from house hunting was no matter how large your deposit was, it wouldn’t increase your borrowing capacity because banks are only interested in your current income and expenses.
“And in that context, this announcement just makes it even harder because it sounds like an extra 5 per cent off pretty much automatically what you’re able to borrow,” Ms Oldfield said.
“It’s obviously the right thing to do, it’s no one’s fault, it’s just a tough situation to be in,” Mr Grooby said.
“Yeah there’s always going to be someone caught in the middle,” Ms Oldfield said.