Will Australia’s Housing Bubble Burst?
Not if The Australian Prudential Regulation Authority (APRA) can help it. APRA announced changes to potential borrowers’ borrowing capacity earlier this month in response to Australia’s rising property prices. From October the 31st 2021, the minimum interest rate buffer on home loan applications will increase from 2.5% to 3%, a move that is anticipated to help curb rising house prices across Australia. Let’s take a deep dive into what this buffer is all about.
What The Buffer Is (And Isn’t)
The buffer essentially means that the big 4 banks governed by APRA need to calculate a potential borrower’s borrowing capacity based on unexpected interest rate rises. The buffer means that future borrowers will have roughly a 5% drop in their borrowing capacity. For example, from October 31st, borrowers who would previously be eligible to borrow $500,000 will only be able to borrow $475,000. APRA chairman Wayne Byres also noted that the buffer “will not have any impact on mortgage interest rates”.
The Why Behind The Buffer
APRA notes that Australia is seeing an increase in the cost of mortgages in proportion to a borrower’s income. According to APRA chairman Wayne Byres, 25% of new home loans in the second quarter of 2021 were 6 times higher than the borrower’s income, which is otherwise referred to as Debt-to-Income Ratio (DTI). Figures like that suggest future changes to interest rates could be unsustainable for borrowers. Prospective buyers living in Australia’s most expensive cities like Sydney and Melbourne are more likely to suffer financial hardship in the event of interest rate rises or changes to employment.
Who Will And Won’t Be Affected?
The buffer won’t impact those who already have an existing mortgage. Only Australia’s big 4 banks, CBA, NAB, ANZ and Westpac Bank, are subject to it. This means that smaller 2nd tier banks and lenders like Bankwest, P&N Bank and Macquarie, Bank of Queensland, (including non-conforming lenders) are not required to implement the new buffer. Ultimately, the buffer is expected to have a bigger impact on investors more so than owner-occupied home buyers, who are more likely to borrow higher amounts in comparison to their incomes.
What If It Doesn’t Work?
Good question! APRA, The Commonwealth Bank and ANZ have all pointed out that the buffer is a modest and prudent measure, however APRA chairman Wayne Byres has noted that the increase in unsustainable housing prices will be kept under close review, hinting other steps could be taken if the buffer increase doesn’t have its desired outcome.
With the home loan lending environment constantly changing, now more than ever it’s important to seek the right advice that will not only help you buy your dream home but benefit you for years to come. As Mortgage Brokers we are governed under the Best Interest Duty; therefore, we will always act in your best interests, not in the banks’ best interests. We have access to products from the 30+ Lenders, with hundreds of lending products. Feel free to send us a message by using the link below or contacting us via our website or social media pages.
Written by Jason Pestano