This article originally appeared on Nectar Mortgages and has been published here with permission.
From 31 October 2021, The Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The required buffer is now 3.0%.
What is a Serviceability Buffer?
When banks lend money, they want to control the risk and ensure you could still repay or service the loan if interest rates rise. So, when they assess your application, they add an extra amount to your market rate, known as a serviceability buffer.
Before 31 October 2021, banks used a 2.5% serviceability buffer but APRA’s changes saw this increase to a minimum of 3.0%. That means if you applied for a new loan with a 2.49% interest rate, you would either be assessed on your ability to repay the loan at 5.49% (2.49% + 3.0%) or the bank’s floor rate, whichever is higher.
Who Does This Affect?
Both owner-occupiers and property investors taking out a new home loan.
This change does not directly affect any current loans, but it will reduce the new maximum loan amount for a typical borrower by around 5%. If you’re thinking about borrowing soon and want to discuss the specific impacts on your financial plans, please get in touch.
Why Did APRA Take This Step?
The current lending environment of low-interest rates and rapidly rising house prices has resulted in a very high level of household debt across Australia. APRA expects the household debt growth to exceed the household income growth in the period ahead, creating concerns about strain on loan repayments and potential defaults. Read more about the decision here.
Increasing serviceability buffers is just one tool used by financial authorities to influence the lending market and it is quite possible that further measures will be introduced soon. With this in mind, if you would like to explore accelerating any of your financial plans, please get in touch with a Whiteroom Finance broker today.
