With the end of the year fast approaching, (yep, it’s almost 2022!) we are seeing a continued shift on the lending landscape.
You will know the Australian property market is rocketing away with record sales and record values across the board. This hasn’t been seen since the early 2000’s and most of us know what goes up, must come down. But – no need to panic. It seems while things are going up fast, the breaks are starting to be applied from a finance regulation stance. This is expected to slow the market down, ease inflation and make for a for a “soft landing” in property prices. This will then allow incomes to rise sufficiently, making housing more affordable.
APRA, the Banks main regulator, are working on restricting the amount you can borrow using 2 “levers” at their disposal:
- Debt to Income restrictions – what this actually means is that how much you can borrow may be restricted to a multiple of your total income. To keep it simple, say you earn $100k as a household. APRA may restrict your borrowing capacity to a maximum of 4 times. Meaning the most you can borrow is $400k. This is a very simple example, but when implemented it will greatly restrict the borrowing capacity of most people.
- Increase the “Assessment rate buffer” from 2% to 3% minimum – again in simple terms, lets say you want to refinance your home loan and the rate you are offered at the bank is 2.5%. The bank will calculate your ability to repay the loan at 5.5% (2.5+3 = 5.5%). On average this can restrict the amount someone is able to borrow on a home loan by about $100k.
Put both of these together and the results can be quite restrictive on the amount you will be able to borrow. This will generally flow onto business lending as well.
While this may to some seem like bad news, overall it is a much better result than the RBA increasing interest rates as the amount you pay on your finance doesn’t change. Just the amount you can borrow.
However, these changes will only apply to ADI’s (authorised deposit taking institutions), basically meaning those with banking licenses. Smaller lenders (generally called tier 2 or tier 3 lenders) don’t abide by these regulations in general and can set a more even tone. The outcome of this could be the ability to borrow more, yet at a slightly higher cost (interest rate) depending on your situation.
There are also other ways to look at increasing your borrowing capacity and that is to eliminate “consumer debt”. Think of things like credit cards, afterpay and other assorted types of debt. We are constantly amazed at the number and limits of credit made available to our clients from the banks. The issue here is that if you have a credit card with a limit of say $30k, it can reduce your borrowing power by about $150k even if there is NO debt on it. Just having the limit is enough to reduce your ability to borrow.
We think that’s why it is important for our clients to discuss their finance options with us prior to exploring the market. With over 40 lenders of all shapes and sizes, along with years of experience, we can generally work out a great outcome.
If you would like more information or a confidential discussion around your circumstances, please feel free to get in touch with Ben or Anthony at HTA Finance.