How APRA Will Reduce Your Borrowing Power

I think this will slow the first home buyer and upgrader owner occupied market if a DTI cap of 6 is made. This week I had a client sell her home for 200k higher than expected. That's around the difference their borrowing will be hit by if the new rules come in before they buy their upgrade property. And at the lower end for a couple with a combined income of say 100-120k would struggle to buy in western Sydney on today's prices. In the short term all I see is a benefit for more investors to come back in the market with less competition from owner occupiers if the proposed changes are made.

 

Great analysis / thread @Redom !

I just had a look through my September data and would've thought the % of applications with DTI >6 was higher but it is lower than this data point.

Seems in the most point that DTI isn't going to be constricting servicing as it is the other measures that most lenders use that have done this already e.g. non HEM servicing for private health, strata, etc.

Looks like we're going the other way away from the "responsible lending reforms" that were being touted about in late 2020 around making it easier for borrowers!

 

Thanks @Morgs

Some insight into the precise measures that will be put in place was indicated by the RBA in todays rate statement - adds some likelihood to a higher assessment rate buffer approach (Option 1) to lowering borrowing capacities. If likely, then a 6 - 6.5% benchmark rate being applied is likely cutting BC's by 10-15%. Given this is broad based, its likely to have the largest impact compared to other approaches noted (e.g. Option 3).

Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak. Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors. The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates. In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.

 

So no one is looking at low doc????

 

0.5% increase in minimum interest buffer from 2.5% to 3.0% by APRA today. Could take further action if necessary.

If this is the only change, I would guess the impact on borrowing capacity would not be high.

 

Yes its very marginal. In these charts for new owner occupiers and new investors, its effectively moving from BAND 1 (current) to BAND 2, roughly a ~70k drop in BC. A little less for lower LTV loans with some lenders, where the interest rate will be below 2.5% (and hence below 5.5% given floor rates are a bit lower than this).

• I.e. for new investors without existing debts, this has approximately a 3% change in BC.
• For new owner occupiers, at a maximum, this has approximately a 5% change in BC.

Overall market impact of this is quite small. There would still be plenty of borrowers who can still access DTI's around 7 (albeit a little less than before) should lending policies remain broadly similar with just an assessment rate change.

 

Do we believe these types of serviceability measures will redirect investment into capital cities with higher rental yields?

 

So a fart in the wind of a change What's for dinner tonight? I might have steak

 

I don’t think this lending change will adjust buyer preferences all that much - this change alone is too modest.

 

Possibly a daft question, but does this increase in servicing assessment apply to ALL forms of lending from banks overseen by APRA?

Car loans, margin loans, etc.

 

Well this is what I am distilling from the recent changes and the direct impacts:

1. The impact will be about 5% of borrowing capacity.

2. Lower income earners more impacted than higher income earners.

Non-direct impacts:
1. Banks ..in particular the Big 4 more may be even harder - i.e. CBA.
2. Investors will be more likely hit.
3. This is predominately psychological...a shot across the bow.
4 Impact most felt in Melbourne/Sydney markets potentially Brisbane.
5. Banks might introduce via self regulation limits to borrower over 6x DTI

Potential Future Impact
1. If this does not work...it is very likely APRA may tighten further. Or like in NZ/Canada/Norway the RBA may jump rates 50 basis points.

So for the moment...there will be a small impact but business as usual. ...for the moment.

Due your own due diligence lots of vested interests on here...are you Wild E Coyote?

Impending pain for mortgage payers

 

Are there any lenders out there that are not goverend by APRA? Where there is no lending criteria's for DTI ratios <6 and larger buffer rates?

 

Yes quite a few non-banks have alternative servicing calc that offer investors DTI>10 in some cases. Usually at a 50-100bp risk premia.

 

I had Westpac approval issued in October before APRA serviceability changes were introduced. My pre-approval expired and the broker advised me that my borrowing capacity has been reduced by 10.81%.

I asked the broker that most people talking about the reduction of 5% borrowing for PPOR. He advised me that many lenders have already enforced higher benchmarks and thus the borrowing capacity has reduced across the board. DTI x 6 now used by many landers.

Most pre-approval issued before APRA changes will expire on 30 Jan 2022 and new approval will have 10-15% reduction in borrowing capacity. Since this boom is credit-driven, low borrowing capacity will limit the future price growth.

@Redom do you have a similar observation.

 

Yes that's broadly correct. If you have a lot of debt already at rates roughly above 2.5%, than your borrowing power reduction will be greater as the increase in assessment rate is applied across all of your existing debt.
If you have NO debt and you access low rate OO loans (<80% ltv usually), then the impact is near nil.
The majority of buyers in the market don't have too much debt, hence the overall BC impact is broadly 5ish.