Loans Capacity Boosted By APRA

Posted on 9/07/2019  
Loans Capacity Boosted By APRA

A major constraint on borrowing limits has been removed by the banking regulator APRA, allowing real estate buyers to borrow more.

Comparison website RateCity suggests the changes could allow a household on an average income to borrow up to $77,000 extra, while an average full-time worker could borrow up to $66,000 more.

The Australian Prudential Regulation Authority has officially confirmed what was revealed in May just after the Federal Election – that it would scrap a rule introduced in late 2014, which had meant new mortgage customers were assessed on their ability to manage repayments with a 7.25% interest rate.

APRA said that instead of that interest rate "floor," it would require banks to test if customers could manage repayments with rates at least 2.5 percentage points above a loan's current rate. The decision is effective immediately.

 With many mortgages currently attracting interest rates of about 3.5%, the change is likely to mean banks will need to test whether borrowers can afford their loan at a rate of about 6%, instead of 7.25%. As a result, a customer's borrowing capacity could increase by 10% or more.

RateCity estimates a family of four with a household income of $110,000 would see their borrowing capacity rise by $77,000. This would lift the maximum loan available to this hypothetical household to $636,000.

Borrowing capacity has been further boosted by two reductions to the official interest rate, which has translated into lower mortgage rates.

UBS economist Carlos Cacho said households on an income of $200,000 a year could boost their loans by an extra $150,000 to $1.25 million if they gained a leading market interest rate.

The moves have prompted media commentary that a wave of prospective home buyers is set to hit the housing market.

Federal Treasurer Josh Frydenberg says the changes will allow borrowers to establish a foothold in the ­property market.

“APRA’s changes will make it easier for home buyers to obtain a loan by lowering the minimum ­interest rate against which ­applicants must be assessed,” he says. “This is further good news for home buyers and the property market.”

APRA’s decision to ease ­restrictions is the latest in a series of moves to supercharge ­housing markets, following back-to-back ­Reserve Bank rate cuts and the passage of Scott Morrison’s $158 billion tax package ­delivering low to middle-income earners up to $1,080 in immediate tax relief.

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