At last some good news for homeowners and investors.
Not surprisingly with the Federal election now out of the way there are two significant market factors which we expect to give Australian property finance markets a nice little push along over the next several months.
Firstly, the Australian Prudential Regulation Authority (APRA) is finally proposing a relaxation of the loan affordability measures that presently require all consumer borrowers to be assessed against their ability to repay a loan at a 7.25% interest rate.
Secondly, and very much a key factor driving the first point above is that all economists believe it will be at least 18 months before we see any interest rate rises as there are compelling economic signals that the RBA will cut official interest rates which should in turn flow through to lower borrowing costs for all.
Why are lending rules being eased?
There exists a wide gap between APRA’s 7.25% floor and the current mortgage rates being offered of around 4%. The inflexibility of the serviceability assessment for the past 4.5 years by APRA has made it difficult for borrowers to obtain a bigger mortgage, and in some cases, even get a mortgage at all.
The measures for loan affordability were put in place to stop people from borrowing beyond their means. It is always prudent for both borrowers and banks to factor in an interest rate buffer when considering any form of a loan. However, a buffer in excess of 3% above current interest rates is simply overkill, in our opinion.
Greater borrowing capacity means greater buying power which we believe will have a positive effect on property values.
So what does this mean for borrowers?
A relaxation of loan affordability measures means that people that haven’t been approved to take out a mortgage in the past will now be given a green light.
By way of example. A family who rents has a total household income of $155,000 with two dependents, $4,000pm living expenses and a $10,000 credit card, have a maximum borrowing capacity of $860,000 at the current ‘assessment rate’ of 7.25%.
If this assessment rate was reduced to say 5.25%, still about 1.5% above current borrowing rates, that same family’s maximum borrowing capacity increases by 23% to $1,060,000.
With the median house price in Sydney over $1 million, the family is now able to realistically look at owning a home in this market.
Lenders to set their own borrowing floors
While APRA is permitting banks to set their own serviceability levels there will still be a number of checks in place to ensure affordability. For instance, banks must build a 2.5% buffer on top of the borrower’s mortgage rate and ensure that borrowers can comfortably service their mortgage repayments.
With the Reserve Bank also looking likely to cut the official cash rate of 1.50% shortly, this is a good time for homeowners and investors to take advantage of more relaxed lending criteria and lower mortgage rates for residential and business property finance.