Responsible Lending Changes

Responsible Lending Changes

The Australian Prudential Regulation Authority (APRA) has written to all banks to increase the buffer on which they stress test borrowers by 0.50%. This buffer is added to the interest rate of the loan, and borrowers are assessed on whether they can repay with the buffer to ensure they can withstand higher interest rates in the future.

So how will the Responsible Lending Changes affect you?

Most lenders who are Authorised Deposit-Taking Institutions (ADIs), i.e banks currently stress test you at a rate of around 5.25% or 2.50% on top of your revert rate (which is your rate post your fixed term) whichever rate is higher, when assessing your application.

Now, the lenders will need to stress test you at 3.00% on-top of your revert rate.

We anticipate that this will decrease borrowing capacity by around 5%, (but this will differ with individual circumstances and lenders). Hence, if your maximum borrowing capacity was $500,000, we expect that this has now been reduced to around $475,000.

Change in dwelling values (%)

Why changes the Responsible Lending Laws?

APRA is concerned that the current environment for residential mortgage lending is underscored by very low-interest rates and rapidly increasing housing prices. Household debt levels relative to income are high and the rate of household credit growth is likely to exceed income growth for the foreseeable future, further adding to debt levels. House prices in Sydney, alone up 20% in the past year (source Corelogic).

How about Non-Bank lenders?

The higher buffer will not be extended to non-bank lenders because APRA said their level of housing lending is not material enough. APRA can only enforce rules on non-banks if their actions “materially contribute to risks of instability in the Australian financial system” and APRA said it “does not consider there to be a basis for a policy response in relation to non-ADI lenders at this point”.

What is the difference between banks and non-banks? Read our short blog here.

Our view is that this will eventually curb the growth of housing prices to more moderate levels of around 10-15% p.a. over time and not address the underlying fundamental issues of low levels of supply of properties for sale not meeting excessive levels of demand.