The Australian Prudential Regulation Authority has told banks to lift the minimum interest rate buffer they use when assessing whether borrowers could still meet their repayments if rates rise from record lows.
The move will be easy for banks to implement ahead of the likely introduction of lending restrictions targeted at high-debt borrowers, realestate.com.au economist Paul Ryan said.
“This is a sensible first step in addressing concerns about growth in the housing market,” Mr Ryan said.
“It’s easy to implement, it’s relatively costless from a borrower perspective, and on a blanket level it reduces how much people can borrow so it will act to slow down the housing market without having a meaningful operational impact on lenders.”
Increased serviceability buffers will reduce the maximum amount homebuyers can borrow. Picture: Getty
Banks will now have to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least three percentage points above the loan interest rate. Lenders currently apply a buffer 2.5% higher than the loan interest rate, or the bank’s ‘floor’ rate, whichever is higher.
APRA estimated the increase in the serviceability buffer will reduce the maximum borrowing capacity for the typical borrower by about 5%.
APRA said it expected the overall impact on aggregate housing credit growth to be “fairly modest”, given some borrowers were already constrained by the floor rates lenders use and many borrowers do not borrow at their maximum capacity. The increased buffer applies to all new borrowers.
Mr Ryan said the 5% reduction is a significant amount.
“A surprisingly small number of borrowers actually go up to the limit, but it does filter down in its effects,” Mr Ryan said.
Commonwealth Bank head of Australian economics Gareth Aird said just 8% of home loan applicants at CBA – the nation’s largest mortgage lender – were borrowing at their maximum capacity over the first half of 2021.
“The policy change will result in some future applicants borrowing less money than they would have otherwise,” Mr Aird said.
“But our initial assessment is that current momentum in the housing market is sufficiently strong that the overall impact on dwelling price growth next year will be modest.”
Home loan crackdown on the cards
Comparison site RateCity estimated the average family’s maximum borrowing capacity could drop by $35,025 to $665,475, and by $28,515 to $541,785 for a single person on the average income.
“These new changes will clip the wings of people borrowing at their capacity,” RateCity.com.au research director Sally Tindall said.
“Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want.
“The change will be a hard pill for some borrowers to swallow, however, it will ultimately protect them from overstretching themselves and that’s a good thing,” she added.
In a letter to banks, APRA chair Wayne Byres said the mortgage serviceability buffer provided an important contingency for rate rises over the life of the loan as well as for any unforeseen changes in a borrower’s income or expenses.
APRA said the impact of a higher serviceability buffer is likely to be larger for investors than owner occupiers. That was because, on average, investors tend to borrow at higher levels of leverage and may have other existing debts, to which the buffer would also be applied.
It noted first-home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income because they tend to be more constrained by the size of their deposit.
But Housing Industry Association chief economist Tim Reardon said the changes will make it even harder for renters to achieve their goal of owning their own home.
“First-home buyers accounted for 35% of owner-occupier loans in August 2021 and these measures will make it harder to access a loan,” Mr Reardon said.
“First-home buyers are the group who are typically constrained by serviceability thresholds. It is this group that will be hit the hardest by these changes.”
The lending changes are expected to impact first-home buyers and investors. Picture: realestate.com.au/buy
Mr Ryan expected first-home buyers and low income earners to be impacted by the buffer changes more than most, as they tend to borrow at higher capacities.
“This will crimp access to the market even more for those people stretching to get on the ladder,” Mr Ryan said.
Noting the investor share of new lending was relatively low at about 30%, Mr Ryan said regulators were concerned about high-debt investors rather than investors per se.
“Mum and dad investors investing in a second property are not their concern. It’s highly-leveraged people investing in their 10th or 11th property they’re worried about,” he said.
Regulators including the Reserve Bank of Australia and APRA have been discussing possible macroprudential measures or lending restrictions, with housing credit growth accelerating as property prices surge.
Mr Byres said the increased serviceability buffer was a targeted and judicious action designed to reinforce the stability of the financial system.
“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Mr Byres said in a statement on Wednesday.
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily-indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”
Regulators are focused on high-debt borrowers amid the housing market boom. NSW Picture: Getty
APRA data for the June quarter showed 21.9% of new loans went to borrowers with debt that outweighed their income by more than six times, compared to 16.1% a year earlier.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead,” Mr Byres said.
“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”
Mr Ryan noted the RBA was set to keep interest rates at a record low until 2024.
“Regulators want to get out in front of risks in household indebtedness that build when interest rates are low for an extended period of time,” Mr Ryan said.
14 Oct 2021
Mr Byres told banks to review their risk appetites for lending at high DTI ratios.
“While the use of a higher serviceability buffer will reduce risks for individual borrowers, growing portfolio concentrations of high DTI loans also need to be monitored closely,” he said.
“Should concentrations of this lending continue to rise, APRA would consider the need for further macroprudential measures.”
APRA had considered increasing the interest rate floor lenders also use or imposing limits on high debt-to-income lending, which would more precisely target more highly-indebted borrowers.
APRA said raising the interest rate buffer was the most appropriate tool to use on this occasion. “It does not rule out that other measures might be used in the future,” APRA added.
As housing prices surge, APRA has not ruled out further macroprudential measures. Picture: realestate.com.au/buy
Mr Ryan said APRA was still foreshadowing direct measures on high-debt borrowers by limiting the amount of debt that can be taken out at six or more times a borrower’s income.
“The rate buffers will reduce everyone’s debt capacity, followed by DTI measures, which target specific types of buyers that might be engaging in speculative activity, like investors,” he said.
ANZ head of Australian economics David Plank said the increased loan serviceability buffer was a modest change in the context of the current strength in the housing market, noting APRA expected the impact on housing credit growth to be fairly modest.
“As such, further macroprudential tightening seems more likely than not. But not before the Council of Financial Regulators has had time to assess the impact of this move,” Mr Plank said.
APRA is reviewing its macroprudential policy toolkit, with its framework to be outlined later this year.
While APRA made it clear it was not seeking to target the level of housing prices, the introduction of macroprudential controls is expected to contribute to slowing the hot pace of property price growth.
Mr Ryan said marginal borrowers who were borrowing at their limit now had less to borrow, while the increased serviceability buffer would influence people’s expectations for price growth.
“If people can’t borrow as much as they were able to, people may expect lower housing price growth in the future and so they may bid up houses a little less strongly than they have been,” he said.
“I think this will have a meaningful impact on house price growth.”
Mr Aird said CBA economists did not believe the increase in the interest rate buffer is enough to materially shift the outlook for housing prices in 2022. They expect national dwelling prices to rise by 7.0% next year, following a 20% jump this year.
Mr Aird said the 2022 forecast was on the proviso there were no further policy changes from APRA on home lending, but additional changes cannot be ruled out.
“If it turns out to be the case that the housing market is still causing the Council discomfort in 2022 the most likely policy response would be to further increase the minimum interest rate buffer,” Mr Aird said.
“At this stage we consider that unlikely, particularly given we expect fixed rate mortgages to drift higher over 2022.”
ANZ economists had factored in the introduction of macroprudential controls by the end of the year into their forecasts for house price growth to slow from just over 20% in 2021 to closer to 7% in 2022.