Home loan crackdown - is it getting harder to get a home loan?

In a bid to improve lending standards, the Australian Prudential Regulation Authority (APRA) is set to increase the minimum interest rate buffer from 2.5% to 3.0%. This is the interest rate buffer that banks and lenders use to assess the serviceability of the home loan applications they receive.

A home loan interest rate buffer helps lenders figure out whether an applicant would still be able to make repayments if the interest rate increases. Interest rates fluctuate, so it would be risky for a lender to approve a borrower who would be unable to handle an interest rate rise.

In this article, we’ll explain what a home loan buffer is, why it’s increasing, and how it could impact home buyers.

What is a home loan buffer?

A home loan buffer is a way of assessing a borrower’s ability to repay their mortgage. Authorised deposit-taking institutions (ADIs) will now calculate a borrower’s ability to repay their loan at the advertised rate, as well as at a rate at least 3.0% above the advertised loan product rate.

Let’s say you are applying for a 30 year $400,000 home loan with a 3.0% interest rate. Using Lendi’s repayment calculator, your monthly repayments would be about $1,686 with this interest rate. But, if that interest rate rises to 6.0%, your repayments would increase to about $2,398 per month. The lender will consider whether you can comfortably afford this kind of increase before approving your application.

Why is the home loan interest rate buffer increasing?

APRA has increased the minimum interest rate buffer to reflect the “growing financial stability risks from ADIs’ residential mortgage lending”. APRA have noted an increased number of heavily indebted borrowers, with one out of every five new loans approved in the June quarter being at least six times the borrower’s income.

Borrowers with very high debts are more likely to struggle with future interest rate increases, as well as any reduction in income. So, APRA is preemptively working to prevent the financial instability that could arise from increased interest rates when the economy bounces back post-pandemic.

If borrowers are unable to meet their home loan obligations, this will negatively impact lenders and the economy more broadly. This is because a heavily indebted borrower will likely decrease their consumption if they’re facing mortgage stress.

Will these changes make it harder to get a home loan?

In short: yes. But this doesn’t mean that it will become impossible. The changes being introduced are a risk-prevention strategy for borrowers, lenders, and Australia’s economy. As the economy improves after lockdowns end, the Reserve Bank of Australia’s (RBA) cash rate is likely to increase. This will lead to higher interest rates and could pose a challenge for borrowers who are already barely affording their mortgage repayments.

With the 3.0% buffer, borrowers will not be able to get a home loan unless they can afford repayments at an interest rate that is at least three percentage points above the loan product rate. Naturally, this will exclude some prospective buyers from being able to afford the properties they would like to purchase.

How will the buffer change impact first home buyers?

With house prices so high across most of the country, buying property is already a challenge for first home buyers. Unfortunately, the increased minimum interest rate buffer will raise the bar even further.

Because accessing a loan will become more difficult, home ownership may trend downwards, particularly among the younger buying generations. It’s possible that with fewer people being able to access home loans, housing value growth could stagnate.

However, it’s important to note that the increased minimum interest rate buffer on home loan applications is only minimal. The previous buffer was 2.5%, and now it has increased by 0.5% to 3.0%. There will be plenty of first home buyers who can handle this change, with some lenders, like CommBank, having already increased their serviceability floor rate.

If you’re planning to buy a property soon and want to learn more about your home loan options, Lendi’s Home Loan Specialists are here to help. In the meantime, here are some more articles to help you move towards buying your first property:

• Grants and concessions for first home buyers
• A beginner’s guide to buying your first home
• What mortgage stress is and how to avoid it
• How to spring clean your finances

What could your home loan repayments look like?

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.