Home buyers will be able to borrow about 9 per cent more if bank regulators pull the trigger on proposed changes to the way loan applicants are assessed, projections show.
The Australian Prudential Regulation Authority announced today it would review a current requirement that banks assess borrowers’ serviceability based on a minimum 7 per cent interest rate.
Proceeding with this change would remove a significant barrier for borrowers and ensure more people could get into the market, especially if interest rates were cut further, the research revealed.
Buyers’ borrowing capacity would increase by 13-14 per cent if the changes coincided with the Reserve Bank slashing the cash rate two more times this year, according to the Riskwise Property Research.
Riskwise CEO Doron Peleg said this will be a “major boost to the market”.
He added that the changes would be enough to have a meaningful impact on the market while “still having good risk-management practices.”
“Interest rates are now very low with a very high likelihood of additional cuts by the RBA, and no signs of increases in the foreseeable future,” Mr Peleg said.
“A low interest rate environment has, effectively, become the ‘new normal’ in Australia.”
The removal of the current stress test on loan applicants’ serviceability was also timely considering banks were lending more responsibly, Mr Peleg said.
“Loan applications are heavily scrutinised, lenders are applying more conservative credit policies (and) the proportion of interest-only loans is now low.”
The 7 per cent buffer was originally instated to ensure mortgagees were able to meet repayments on interest rates higher than current levels (some lenders offer standard variable rates as low as 3.47 per cent).
It was introduced when the Sydney and Melbourne housing markets were booming in late 2014 and was designed to help contain rising prices.
APRA’s decision to reconsider the current policy suggested it was giving in to pressure from the banking sector, which had been calling for an urgent review.
Restricted access to credit has been one of the driving forces behind the current housing downturn, with fewer buyers able to purchase properties listed at higher prices.
Sydney’s median house price has fallen nearly 14 per cent since peaking in July 2017, while national prices have fallen by about 6 per cent over the past year.
The proposed removal of the buffer followed an earlier announcement from APRA that it would remove its 10 per cent growth cap on investor lending.
The regulator will also be easing its 30 per cent limit on interest-only lending.
The Urban Development Institute of Australia (UDIA) said the APRA move was a good one.
“This is something we’ve been calling for — even as recently as yesterday — and it’s great news,” UDIA National President Darren Cooper said.
“The current benchmark of 7 per cent has made credit really hard to come by and it has been stifling the residential property market.
“This change will help more people get access to credit and buy residential property. It will also help stabilise property prices around the country after the uncertainty leading into the federal election.”
CoreLogic analyst Cameron Kusher said that while the changes would ensure more people could access a mortgage it would not result in a rebound in the housing market because banks were more accustomed to responsible lending.
“These proposed changes in conjunction with the uncertainty of the election now behind will potentially provide additional positives for the housing market,” he said.