“APRA has finalised its proposed changes to the serviceability* assessments performed on residential mortgage applications, effective immediately.
In a letter to ADIs issued today, the regulator confirmed it will no longer expect lenders to assess home loan applications using a minimum interest rate of at least 7%.
Instead, ADIs will be able to review and set their own minimum interest rate floor and utilise a revised interest rate buffer of at least 2.5% over the loan’s interest rate.”
You might be thinking, “What does this all mean? Is this even English?” Don’t worry, because you’re not the only one! Here’s a breakdown that makes it a little bit easier to follow:
APRA’s new and relaxed home loan rules will allow for more realistic mortgages.
Who is APRA? The Australian Prudential Regulation Authority – an “independent statutory authority that supervises institutions across banking, insurance and superannuation, and promotes financial system stability in Australia”.
They’ve relaxed their strict lending regulations on banks and other financial institutions.
Banks normally run a Bank Stress Test that measures the risks associated with accepting the applicants loan i.e. checking if this customer can afford the loan repayments. And specifically, if the customer can afford at least 7% interest rate on their mortgage repayments.
With the new APRA rules, Banks now don’t have to run a Stress Test. They now have the freedom to regulate their own serviceability buffer.
The only restrictions set by APRA that banks and financial institutions must follow is that loan interest rates must be at least 2.5% higher than what the current interest rate is sitting at. This means a more realistic forecast on what a mortgagee may need to be prepared for, within the life of their loan.
Read more about this from the experts:
If you have any questions or concerns about your buying/selling opportunities due to these changes, just give me a call!
*Serviceability: the ability of a borrower to meet loan repayments