APRA Tightens Home Loan Borrowing
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APRA Tightens Home Loan Borrowing

The move is said to counter rising risks in home lending.

By Terry Christodoulou
Wed, Oct 6, 2021 10:09amGrey Clock < 1 min

The Australian Prudential Regulation Authority (APRA) has today increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

The prudential regulator says the move will reduce the maximum borrowing capacity for the typical borrower by around 5%.

APRA has written to banks telling them to increase the buffer by 0.5% from 2.5% to 3%.

The buffer is added to the interest rate of the loan and borrowers are assessed on whether they can repay with the buffer to guard against higher interest rates in the future.

APRA Chair Wayne Byres said this is a targeted and judicious action.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” said Mr Byres.

It comes as housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers. In the June quarter of 2021 more than 20% of new lending was to borrowers that had loaned more than 6 times their pre-tax income – a figure that is high by historical and international standards.

“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.

APRA decided to not use an interest rate floor as it said moving the floor would have a larger impact on owner-occupiers. The regulator had previously used a set floor until 2019 when it handed responsibility back to banks.



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How Much House Can I Afford?

Expert tips for prospective buyers looking to purchase a home in 2024.

By Josh Bozin
Fri, Apr 12, 2024 3 min

For aspiring homeowners, be it a first-time buyer, downsizer, or investor, picturing your idea of homeownership bliss is the easy part. But before deliberating on furniture choices or scouting for that perfect neighbourhood coffee, understanding your purchasing power stands out as the most important step in ensuring your success in homeownership.

And with the Australian property market gaining momentum in 2024, there’s never been a better time to come to grips with your financial options.

In 2023, amid the changing financial landscape that saw rising interest rates and the cost of living skyrocket, among other factors, the total amount borrowed for property purchases across Australia was estimated at $300.9 billion, a 12.7 percent decrease from the previous year, according to PEXA’s latest Mortgage Insights Report.

Each mainland state also experienced a decline in new lending, according to the report, with Victoria and New South Wales seeing the biggest drops to $84.1 billion and $109.5 billion, respectively.

While this trend reflects the repercussions of such financial hardships on the everyday Australian, John Morello, director and auctioneer at Jellis Craig, said we’re seeing renewed confidence in the property market during the first quarter of 2024, particularly in Melbourne.

“Auction clearance rates have started the year strongly and consumer sentiment is rising. This lift is driven by cooling inflation and an improved outlook on interest rates. At Jellis Craig, as with the rest of the market, we are experiencing an increase in volume of property compared to the same period in March last year (up 28% in 2024),” Mr Morello said.

“Melbourne’s property market, in particular, is showing its ongoing evolution and resilience.”

PEXA’s report revealed that, while borrowing saw a decrease in 2023 in Australia, Australians still invested $613.0 billion in property purchases in 2023. In 2024, purchasing confidence is only going up, as prospective first home buyers, seasoned downsizers, and savvy investors look to capitalise on a flood of new property hitting the market, coupled with the lowering of interest rates across the board.

“With more certainty in the economic outlook, along with an increase in volume of property available, we are seeing these factors translate to early signs of a boost in confidence in both buyers and sellers,” said Mr Morello.

“Further encouraging data shows that whilst there is more property available to purchase, more people are inspecting property, again indicating that demand has increased broadly across our marketplace.”

If you’re in the market for a new property, the biggest question you must ask yourself is how much house can I afford?

A great starting place is to speak with your mortgage broker or financial professional, who can guide you on your lending options. This is critical, as you need to know what your future repayment options might look like, and ultimately, what you will typically be able to afford.

A useful tool for judging whether you can afford a specific property is to factor in the 28/36 rule — a rough guide that suggests you should not spend more than 28 percent of your gross monthly income on housing, and no more than 36 percent on all debts. Another useful tool is the idea of a debt-to-income ratio (DTI); a formula whereby an individual can divide all of their monthly debt payments by gross monthly income to arrive at a number that one can measure as a way of managing monthly mortgage payments.

Mr Morello emphasised the need to understand affordability and what’s feasible for each individual when looking to make a purchase, no matter the budget, on a property in 2024.

“It’s pivotal to work out what you can afford. Get your finances in order. Consider all associated costs with buying, and research what concessions and grants are available,” said Mr Morello.

“It’s easy for individuals to begin the process today. Start actively searching potential properties on a weekly basis, and research areas you are interested in. Check weekly sales results, attend inspections and auctions, to get a feel for the process. Just remember, it’s important to be really comfortable in understanding your living expenses, and what the ongoing expenses will be once you have bought a property.

“For example, mortgage repayments, council rates, water, power, owners corp fees, insurances, maintenance costs; if you are buying as an investment, the Land Tax payable on that property which is an ongoing tax. There’s many factors to consider.”

To see what’s possible for your specific circumstances, visit our Finance Portal for specific tools, guides and tips—as well as our own mortgage calculator—to assist you on your property journey.

 

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Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

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