Finance Property Low interest rates forcing home loan rule changes

Low interest rates forcing home loan rule changes

A cartoon house enduring a barrage of airborne currency.
Borrowers could find themselves with better mortgage offers under proposed rule changes. Photo: Getty
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Hopeful house hunters will be more likely to get a home loan and even borrow larger sums under new rules proposed by the financial regulator.

Currently, lenders assess a borrower’s ability to repay their loan by assuming an interest rate “comfortably above” 7 per cent, regardless of the actual interest rate available at the time of lending, to create a buffer in case rates move.

But in a letter sent to lenders on Tuesday morning, the Australian Prudential Regulation Authority (APRA) acknowledged that the 7 per cent interest rate floor is potentially ill-suited, given interest rates have been at record lows for 33 months and aren’t expected to increase in the foreseeable future.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” the regulator’s chair Wayne Byres said.

“Although many of those risk factors remain … recent developments have led us to review the appropriateness of the interest rate floor.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”

Instead, the regulator proposed lenders set their own serviceability assessment guides, recommending that serviceability be assessed against a rate 2.5 per cent higher than the actual rate – meaning someone looking at a loan at 3.5 per cent would be assessed against their ability to repay their mortgage at 6 per cent, instead of the current 7 per cent or higher.

Lower barrier for borrowers

Steve Jovcevski, property expert with financial services comparison site Mozo, told The New Daily that removing the interest rate floor will allow more people to take out loans, and the size of a loan someone can receive will also increase.

For example, someone capable of receiving a $600,000 loan under the current rules could expect to borrow $50,000 to $60,000 more if the floor is removed, Mr Jovcevski said.

“Fifty thousand more in your borrowing capacity doesn’t necessarily mean it’s going to get a lot easier [to get into the housing market], but it will make it a bit easier having that extra serviceability up your sleeve,” he said.

The change is not without its challenges though. Julie DeBondt-Barker, the founding director of Melbourne-based buyer’s advocate Buyer’s Home Base, said that while the change would “put a little bit more life into the market”, it would also place an added burden on buyers’ budgeting skills.

“Home buyers will be able to put a bit more money towards what they want to buy, but the downside I can see is that this puts more of the responsibility back onto the buyer as far as what their limitations are,” she said.

“I think buyers have to understand they’re being handed the responsibility to not over-spend and keep within their budget. They need to be cautious.”

Mr Jovcevski noted that the change is not intended to encourage lending to people who can’t afford to repay their loans, but is a reflection of current economic conditions.

“They don’t want lenders to drop their standards, but they are recognising the low interest rate environment,” he said.

“They’re saying [7 per cent] is no longer a realistic buffer at the moment.”

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