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How APRA’s tighter lending rules affect property investors

Last week, lending regulator APRA (Australian Prudential Regulation Authority) began introducing measures to tighten borrowing rules and cool down what some believe is an overheated housing market.

APRA has said that more rules and lending limits could follow so, if you were planning on buying an investment property in the near future, it might be worth thinking about moving up your timing.

Here’s what you need to know about the change that makes it harder for you to get a loan, before it comes into effect on 31 October – just a couple of weeks away.

How APRA’s tighter lending rules affect property investors

What has changed?     

APRA has instructed banks to increase the interest rate risk buffer for new borrowers from the current 2.5 percentage points to a minimum of three. This means borrowers will need to be able to meet repayments at least 3% higher than the loan product rate to get their finance approved.

The buffer provides an indication of your capacity to service the loan in the event of a rate hike. If you apply for a mortgage with an interest rate of 2.5%, for example, the bank must check that you’ll still be able to repay it if the rate rises to 5.5% – rather than the previous serviceability threshold of 5%.

APRA stopped short of introducing broader market-slowdown measures such as raising interest rates. Instead, it opted for a targeted approach – making it more difficult to borrow money rather than more expensive.

 

Why has APRA tightened lending rules?

Rapidly rising property prices and greater home loan lending (up 47% on last year, notes Canstar) have resulted in higher levels of debt – one in five households is borrowing up to six times their income to buy a house, according to APRA.

Concerned that people are taking on more debt than they can afford to repay, the regulator has tightened the lending rules in order to lower the number of loans that are approved. With interest rates forecast to rise in 2024, APRA is hoping to avoid the kind of financial instability that comes when borrowers start to experience mortgage stress.

Who will be impacted most?

The coming change is expected to bite investors, because “they tend to borrow at higher levels of leverage and may have other existing debts (to which the buffer would also be applied)”, said APRA.

First-home buyers – who typically have lower incomes and deposits – will also be affected, as they face the prospect of being able to borrow less at a time when property costs more.

APRA expects that the maximum borrowing capacity of the typical buyer will be reduced by around 5%, as shown in the table below.

 

Estimated borrowing power by income level

ANNUAL INCOME AV. VARIABLE RATE PLUS 2.25% BUFFER AV. VARIABLE RATE PLUS 3% BUFFER DIFFERENCE
$39,000 $166,000 $158,000 $8000
$59,800 $338,000 $321,000 $17,000
$90,500 $578,000 $548,000 $30,000
$130,000 $882,000 $835,000 $47,000

Source: Domain.com.au, based on Canstar Home Loan Borrowing Calculator. This table is indicative only – please see here for more detail.

APRA’s intervention isn’t a bad thing in principle, as it will stop buyers who can’t service their debt from getting in over their heads. But, from November 2021, securing a loan is only going to get harder and you’ll be able to borrow less.

If you’re thinking of investing in the next 12 to 18 months, finding a property and getting finance approved now might be the difference between buying a quality property in a high-yield, high-growth area and having to compromise on your returns.

For more information, contact Jason Dwyer from Dwyer Property Investments on 1800 088 437.

*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. ​Dwyer Property Investments recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

 

WHAT THE EXPERTS ARE SAYING

 

“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.”

– Wayne Byres, APRA chair

 

“It will be vital for the government and the regulator to monitor the situation closely into 2022, to ensure their efforts do not sap broader market confidence during our economic recovery.”

– Ken Morrison, Property Council of Australia CEO

“The changes are designed to protect people from taking on risky levels of debt; however, it will hurt first-home buyers who typically have smaller incomes and deposits.”

– Sally Tindall, RateCity research director

“Many households don’t borrow at capacity, but anyone who was planning to will have to reassess their budget and potentially their home-buying plans.”

Steve Mickenbecker, Canstar chief commentator

“Further macroprudential tightening seems more likely than not…”

– David Plank, ANZ head of economics

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Jason Dwyer

Jason is the Managing Director of Dwyer Property Investments and a trusted local expert. Together with build partner Dwyer Quality Homes, he’s been helping Queenslanders buy profitable, cash-positive, tax-effective investment property for 35 years. Visit dwyerpropertyinvestments.com.au.

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3-step guide to becoming a successful property investor
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Must-know tips for investing in property (based on 35+ years’ experience)

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