Relaxed Guidelines for Borrowers
Back in 2014 /15 the Federal Government were very concerned about the rapidly rising residential property market, particularly in metropolitan Sydney and Melbourne. At that time they saw a ‘perfect storm’ looming with a possible bubble bursting. Falling home lending interest rates combined with a strong demand in property fuelled by overseas investors, was pushing up market prices with no apparent end in sight.
The low interest rate environment meant that borrowers were able to increase home loan debt levels to situations where a property market correction could see them with negative equity positions. As such the Government’s prudential regulator APRA decided to intervene by taking the heat out of the market.
Apart from the Government increasing the buy in costs for overseas investors, APRA introduced a prudential guideline for (ADI’s) Approved Deposit Institutions (most of the Australian Banks, Credit Unions, Building Societies) which effected how a lender would assess, or test a borrower’s home loan servicing capacity. They did this by introducing a floor 7% interest rate that would apply to all borrowers. Even though they might be paying a bank a rate of 4% their capacity to borrow was tested at 7% or above.
Obviously this impacted negatively on borrowing capacities and began to bite into the size and volume of loan approvals.
There is clear evidence over the last 6-12 months of a residential property market correction so APRA’s intervention has obtained the desired effect. In addition to that, home lending volumes have fallen. Now there are some concerns voiced about Australia’s economic growth and the residential construction sector has wound back off it’s heady period in 2015.
The Reserve Bank of Australia has indicated that interest rates in Australia are likely to remain low for the foreseeable future. A late development in May 2019 saw APRA commence discussions with the ADI’s looking to remove this floor loan servicing assessment rate of 7% and place responsibility back in the ADI’s hands for determining what rate they will use. The discussions will be concluded on or before 18th June. The latest talk is that ADI’s will be able to use the rate that applies to the borrower plus a stress or buffer position of 2.50% . Therefore the effect of this, will be to reduce the servicing assessment rate down to something near to say 6.50%, with the chance that it may fall further with pending interest rate cuts out to Christmas. This will increase borrowing capacity significantly. Of course the ‘sword has a double edge’ and care for borrowers in overall credit assessment, still needs to be adhered to, relevant to their existing and proposed debt levels, but a long low period for forecast home loan rates does bring some certainty.
COMPASS Lending & Finance is here to help . Contact Michael on 65832211.