The times, they are a changing – they really are. They are changing how much someone can borrow to buy their dream home. APRA, the Banking Regulator, is looking to place new rules on the banks to tighten up lending criteria to ensure Australians can continue to afford their mortgages should interest rates go up.
According to APRA, residential mortgage lending accounts for more than 70% of total loans in Australia. To put that into context, that is bigger than the value of the entire Australian stock market. It’s no surprise then that APRA wants to ensure that house prices and lending do not get out of hand. This may mean we see some more changes to how maximum borrowing numbers are calculated in early 2022.
What determines how much a person can borrow?
The key factors that help determine a buyer’s credit assessment and borrow power are:
- Annual Income
- Percentage of deposit you have saved for the purchase
- Amount of equity in another property (if applicable)
What does APRA want to do?
APRA may look to tweak the above points to help determine the results of a buyer’s credit assessment, i.e. the buyer’s max borrowing power. The areas it is likely to change are:
- The amount of income you need to show
- The percentage of deposit you have saved and available for the purchase
Scenarios of possible changes in lending eligibility
- If you have 10% deposit saved, and you borrow 90% of the value of the property (90% LVR), APRA is considering increasing the income you need to show from today’s benchmarks. Until late 2021, banks can generally lend around six times a person’s income. So if you earn $100,000, you can generally secure a $600,000 loan, which is already pretty conservative. But the changes coming in mean a bank may only lend at four to five times annual income, meaning the same person can only borrow $400-500k.
- If you are borrowing for investment purposes, APRA may demand that the banks are stricter on the other measures, i.e. the amount of deposit needed for the purchase. This may result in buyers needing more deposit to make the same purchase compared to if they purchased in late 2021. The same possible changes may apply for “Interest Only” loans.
- APRA wants borrowers to be able to afford higher interest rates at the time they take out the loan. To do that, APRA adds an extra buffer on to your rate that bank uses for the calculation of what you can afford. For example, the rate you get today might be 2.50%, but the bank will need to do the calculation as if the rate is 6.00% for you to pass, and this percentage of testing may increase in the future should interest rates go up.
What does this mean for those looking to purchase a home in 2022?
These changes are expected to come into place around March 2022. Until this time, banks will be able to follow the existing rules, but after this point, lending criteria may get a little tougher than it is today.
Set a goal in the Raiz App to help you save and invest for a deposit!
If you are looking to save or invest for a home, plan now! You can use the Raiz App to set a goal to “Buy a home” and use some of the great features like round-ups and recurring investments to help reach your goal!
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Buying property is one of the biggest money decisions you’ll make in your life, so put in the work to get it right. Get good help around you so you cover all your bases and can confidently buy property knowing you’re on the right track from the moment you make your purchase!
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