Australian banks change lending standards

Australian banks have changed lending standards

On the 5th July, APRA announced that it would be making an adjustment, following a consultation period to APG 223 (Prudential Practice Guide to Residental Mortgage Lending). This proposal was to scrap the current minimum 7% floor applied when seeking a new residential mortgage and instead revise by applying a buffer of 2.5% on the proposed loans interest rate.

In response to that just this week, we have seen Australian lenders updating their servicing guidelines to reflect the changes from APRA.

This means for the lenders that have already made changes, new loan applications with be assessed under the new rules.

What do the assessment changes mean for me?

The new servicing guidelines from lenders being published include a new floor rate of 5.5% or a higher of the actual interest rate plus a buffer of 2.5%. For example, the customer is looking to borrow at 3.5% interest rate + 2.5% buffer, a new assessment rate of 6%.

This is a reduction on the previous floor rate of 7-7.5% applied by lenders. These changes will mean for some borrowers, your borrowing capacity can increase by up to 15-20%

Will this apply to certain types of lending?

It is not totally clear just yet, as not all lenders have published their changes, but the lending looks to target owner-occupied lending, paying principal and interest repayments. Which should assist First Home Buyers, Upgraders and borrower looking to refinance into a better deal.

It looks like banks will target specific types of lending, to reflect the softness in their loan books and fill if they have the capacity. For example, if a lender is underweight in investor loan, they have the flexibility to change their lending policy for investors to attract new applications from mortgage brokers.

When will this apply?

This is starting now as lending announce changes and will be effective immediately as they make changes to their servicing calculators.

Will this create a new credit boom?

Yes, this will increase the borrowing capacity for some types of borrowers, though this needs to be balanced with the conservative changes to lending over the last 3 or 4 years.

Including higher HEM guidelines for living expenses, further shading of other income and strict application of credit policy.

It is yet to be seen, the impact this will have on property prices, but as always responsible lending is encouraged and it is important to ensure loan affordability based on higher actual interest rate repayments.

Currently, we have record low-interest rates and this will not last forever.

Jeremy Harper is the director of hfinance. hfinance is a mortgage brokering business, to speak with a Sydney Mortgage Broker, Gold Coast Mortgage Broker or an Australian expat mortgage broker – contact by calling us on 1300 928 227 or email info@hfinance.com.au