You may have seen in the news this week that there are policy changes on the horizon with APRA, but what does it all mean?
TIP – if you don’t like numbers, or find this subject boring, skip to the bits in bold!
APRA, the body who regulates Authorised Deposit-taking Institutions (ADI’s) – i.e. banks and credit unions etc.. made a change around 3 years ago, forcing ADI’s to assess new and existing loans at a much higher rate to create a buffer for the applicant in case interest rates increase. The minimum set by APRA is 7%, with most lenders adopting a minimum of 7.25% – This is called an “assessment rate”
In actual terms, a mortgage of $500,000 at a rate of 4% with principal & interest repayments would normally be $2,387 per month, although at 7.25% the repayments would be $3,410 per month. This means you need to prove to the bank that you can afford an extra $1,023 per month in repayments, which has a significant impact on the maximum amount you can borrow.
The changes suggested by APRA are to reduce the assessment rate from the minimum of 7%, to a rate of 2.5% over the actual rate you will pay. In other words, on an owner occupied mortgage of $500,000 with a rate of 4%, the bank wants to see you can afford the repayments at 6.5%, or $3,160 per month. This increases the borrowing capacity in this scenario by approx. $40k, or around 8%. As the rate decreases, the borrowing capacity increases. For example, a rate of 3.6% would have an assessment rate of 6.1% and increase borrowing to $560,000 under the same circumstances, or an increase of 12%.
Whilst this doesn’t appears to be a significant increase, a person looking to invest (or an exiting investor) tells a very different story…
Using the same figures, say an investor is looking to purchase an investment property. Where an assessment rate of 7.25% would give them a maximum loan amount of $500,000, a reduction in this assessment rate to 6.5% increases the maximum loan to $550,000 – a 10% increase. If that investor is an existing property owner, with investment debt of $500,000, and the maximum borrowing capacity for a new loan is $500,000 based on an assessment rate of 7.25%, the maximum loan based on a reduced assessment rate of 6.5% would be just under $600,000. That’s an increase of 20%!
There is no doubt investors were the most affected by the APRA changes 3 years ago. Now that these restrictions are likely to be lifted (the banks will still need to change their policies to match APRA as well), investors both new and existing will find lending much easier as a result. This means these changes aren’t guaranteed, although there is a very strong chance they will come to fruition.
There are of course many factors which will impact your borrowing capacity with the bank, and also your own affordability, so a change in the assessment rate might not have the exact like for like result. For this reason it is important to still conduct your due diligence prior to applying for a loan.
As always, if you have any questions, feel free to give me a call!