The number of changes that have taken place in the home loan market over the past 12-18 months have been incredible! The changes can be overwhelming, even for a full time home loan professional. My article in March 2016, covered the changes that banks had initially made, however those were just the tip of the iceberg.
Since then the Australian Prudential Regulation Authority (APRA) have put a number of further changes/restrictions on home loan lending. These changes have been put in place to regulate the lending environment in order to minimise the chance of a banking crisis, should there be a housing crash namely in Sydney and Melbourne. The following items have been scrutinised and had more regulation put in place:
Borrowing capacity – This is the amount of money that the banks will lend you based on your income and expenditure. There are two ways that the banks have restricted your borrowing capacity:
Firstly banks will calculate your mortgage repayments based on an assessment rate which has to be the higher of either a minimum of 7% or 2% higher than the actual rate. Due to these assessments rates being higher than actual interest rates of approx. 3.79%-4.49%, your repayments will be higher and in return restricts the amount of money you qualify for.
Secondly banks have put in measures to allow for higher monthly expenditure. Different banks are using indexes, such as the Household Expenditure Measure (HEM), that gives a minimum amount which potentially could be higher for some people. So higher assessment rates on new and existing borrowings, along with potentially higher minimum living expenditure could significantly reduce the amount of money available to you.
Investment Loans – Investors have felt the brunt of the changes in investment lending, firstly by a reduced borrowing capacity as above and secondly with higher interest rates. Investment loan interest rates have increased by approx. 0.50% to 1% over the past six months. This was mandated by APRA in order for the banks to have a larger capital reserve should the property market crash. In addition, it was to cool down the over-heated Sydney and Melbourne property market where properties have increased by approx. 70% in Sydney and 40% in Melbourne over the last five years. APRA also set a maximum year on year growth of 10% of all investment loans written by the banks. This forced banks such as Bankwest, CBA and CUA to either reduce their intake or completely remove all investment products.
Interest only loans – a much debated topic has heated up even more over the past few months. The most recent change is that APRA has restricted the percentage of interest only loans that the banks provide borrowers. The current percentage of interest only loans written by the banks are 40%, however APRA have restricted this down to 30%. Due to this, banks have increased their interest only rates to slow down the growth, so investors with interest only loans are paying a premium.
In response to the changes we have seen a drop in home loan approvals along with a slight dip in property prices in Sydney. I believe the tightened scrutiny on home loans are here to stay, however there is a large disparity with home loans as each lender can pull levers to meet their quotas. Therefore speaking to a mortgage professional who has access to a panel of lenders can save you thousands in unnecessary interest and more importantly get you your required loan.
Raj Ladher is a local expert on mortgages and financial matters. Originally from the UK, his consultancy firm is now based in Sydney.