If you’ve been considering refinancing your loan or buying a new home, you may have heard that lending rules have changed.
With record-low interest rates and banks trying to undercut each other in the variable rates market, the lending market has been hot. APRA – the Australian Prudential Regulation Authority – has now stepped in as it believes lending policies are helping to fuel the exuberance of the property market.
APRA has instructed lenders to apply a 3% buffer – up from 2.5% – to ensure clients can handle future interest rate increases.
So, what’s this all about, and how does it affect you?
The move is designed to dampen property prices without taking out the sledgehammer of interest rate rises, which would hit the entire economy.
The view of industry experts suggests APRA’s action is not going to substantially impact prices because the market’s momentum is so strong. Buyers remain optimistic but still have a fear of missing out on properties even as more start to come onto the market for sale.
Industry research suggests there are 150,000 homes for sale at any point in time currently, down from a five-year average of 250,000.
So, APRA is putting everyone on notice that it thinks the market is too hot. Its action is a soft warning that everyone needs to pay attention to loan serviceability and be mindful that the current low interest rate environment is unlikely to be around forever, so be careful you don’t overextend yourself.
If prices stay strong, and real estate agents claim they will, what might happen next?
There’s been market discussion about the possibility of APRA demanding a ceiling on the Debt-to-Income (DTI) ratio of loans, which is calculated as part of issuing a mortgage. Speculation suggests it may insist the DTI be limited to six-times income. That would hurt more but still leave interest rates untouched.
It’s hard to put a brake on the property market without increasing rates and hurting first-home buyers and there’s no political appetite to do that.
So, the prevailing view suggests that until broader economic influences such as inflation and wages growth change the picture, we can expect interest rates to remain at record lows and property markets across Australia to continue to perform strongly.
To understand if these new rules could affect you, let’s talk. If you’re currently seeking to refinance to move up the property ladder, considering refinancing or planning to apply for your first home loan, I’d be delighted to assist you.
This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.