The Australian Prudential Regulation Authority’s change in the assessment interest rate has sent shivers through parts of the property industry but in reality, it should only affect a few mortgage holders.
Some people with pre-approvals and anyone applying for a mortgage from November 1 will be impacted by APRA’s requirement for authorised deposit taking institutions to increase their assessment of all new applicants’ ability to meet their loan repayments up to three per cent above a loan’s product rate.
Coast mortgage specialist Brenden Brial of SMS Finance doesn’t expect this decision will cause a rush of loan applications during the next few weeks.
“I also don’t know that it will slow people down,” he says. “But it will make people reconsider what they can buy.”
From November, a person who signs up for a repayment rate of two per cent for example, their lending institution will assess whether the borrower has the capacity to still make the repayments at a rate of five per cent interest within the given term.
This approach isn’t new; lending institutions have always had a minimum floor rate Mr Brial explains. “It was only about 18 months ago that they [APRA] actually lowered it to 2.5. The floor rates are set by individual banks based on their own procedures. Some of them already are using more than 2.5 per cent.”
“They are trying to ensure the whole banking system remains stable and that all the banks are only lending to borrowers who can afford the level of debt,” Mr Brial adds.
Possibly owner-occupiers will be impacted by the APRA decision more than investors who have been coming into the market as they take advantage of the boost in their own home’s value.
So, while the market continues to rise investors will likely keep buying into property. “This increase in the interest rate buffer means that they might have to reconsider the value of the investment property they are buying,” Mr Brial adds.
But really, he says no one will know the effect of the APRA decision for some time. “It’s very much about making a decision and assessing the overall impact in six or 12 months time,” Mr Brial says.
“It’s like turning the Titanic not a sports car; it takes a bit of time.”
This may not be the last change. APRA is committed to considering other macroprudential changes if required.