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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.

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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.

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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:

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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.

Tags: home loan, interest rate, refinance, first home, first home buyer, first property, new purchase

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Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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