Australian Prudential Regulation Authority (APRA) is tightening lending criteria. Announcement made 5th October 2021, many will see this as either a good outcome or a bad change.
Essentially borrowers will be assessed with the expectation that they can pay for the proposed loan if interest rates increased by 3%. This boosts the ‘buffer’ by 0.5% at the time of the statement. For example, a borrower looking at a mortgage with an interest rate of 2.50% would still pay the proposed interest rate, but they will be assessed by lenders with an interest rate of 5.50%. If they can prove to afford the additional 3% assessment rate, then lenders will be inclined to offer them a loan, subject to their other personal circumstances.
Tightening the lending criteria – is it a good thing?
The basis behind the decision, APRA believes having a stricter lending criteria will keep borrowing at a medium-term risk while it will enhance the financial stability now and into the future. This will reduce mortgage borrowers lending at unsustainable levels.
Furthermore, the Reserve Bank of Australia (RBA) conducted their October meeting. The decision was to keep cash rates at a record-low of 0.10%. Throughout this year, the RBA said repeatedly it will not increase the cash rate until underlying inflation is within the 2–3% target range. It’s been additional said, its unlikely to happen until 2024.
Overall, it is a good thing. It makes it harder for borrowers to apply for massive loans that will potentially make them worse off if they are unable to service the debt.
Tightening the lending criteria – is it a bad thing?
This may reduce the buying demand. At present, buying demand is heavily outstripping supply. This has created an above average increase to property property prices. Property affordability has worsened over the last decade. Given the fact, lending assessments will be more strict, buying demand may reduce while affordability may continue to be problematic for many, particularly first home buyers.
Overall, it can be seen as a bad thing to many people, however at Crest Property Investments, we are inclined to favour the change. It will strengthen buyers financial circumstances, promote steady property prices in the future and provide comfort to the overall financial system.
Australian Prudential Regulation Authority (APRA)
“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” APRA chair Wayne Byres said. “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.”
APRA noted that more than 20 per cent of new lending in the June quarter went to borrowers who took on loans greater than six times their annual income. These new changes are well warranted and will ensure people are safely making good financial decisions in advance.
At Crest Property Investments we specialise in sourcing brand new and off the plan properties for buyers. We also do not charge fees to buyers! If you’d like to learn more, please feel free to contact us. We welcome the opportunity to help you make the best property decision.
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October 2021
