What do APRA’s lending changes mean for you?


Our Finance Team Leader, Caylum Merrick, discusses APRA’s latest lending changes, and why they’re not all bad for Perth owners.

After months of speculation, banking regulator – the Australian Prudential Regulatory Authority (APRA), has announced a new lending stress test, which will see the minumum interest rate buffer banks must apply to loan assessments increase to 3.0% (previously 2.5%).

Given the controversy surrounding the last time APRA introduced restrictions back in 2017 and the considerable impact they had on investor lending during this time, many buyers have been left wondering what these changes mean for their borrowing capacity, and whether this initial announcement is a sign of more to come.

To help you navigate these new guidelines, we spoke with our Finance Team Leader, Caylum Merrick, to discuss how the changes impact borrowers, and what you can do to prepare for the possibility of further restrictions.

What are the new APRA guidelines?

Under the new guidelines, APRA has raised the minimum interest rate buffer banks are expected to use when assessing a borrower’s eligibility by 0.5 percentage points to 3.0%1.

By way of background, when you apply for a home or investment loan, the lender will ‘stress test’ your application to gauge how well you’d manage if interest rates rose higher.

The minumum buffer banks were required to use previously was 2.5% above the loan product rate. This means you may have been applying for a mortgage with a rate of 2.8%, but the lender would assess your application as if you were paying a rate of 5.3% (unless, that is, the lender’s individual interest floor rate was higher).

What APRA has done, is lift that buffer to 3.0%. It means that your ability to handle a home loan must now be assessed using a minumum interest rate of 5.8% in the above scenario.

Why are APRA introducing these changes?

The changes have been introduced as a measure to keep a cap on rising household debt levels across Australia. This comes after the combination of increasing property prices and record low-interest rates have resulted in some buyers taking on higher debt to fund a property purchase.

Our Finance Team Leader, Caylum, says this is less of an issue in Perth, where housing affordability remains significantly stronger than other state capitals.

“Compared to the east coast markets such as Sydney, where CoreLogic figures show buyers are facing average property prices above $1,000,000, we’re still one of the most affordable states in Australia to buy here in Perth even factoring in our annual growth of over 18%, so many buyers aren’t taking on these kind of debt levels.”2

He adds, “on the contrary, many owners have actually benefited from a strengthening in their financial position over the past 12 months thanks to the rise in equity that’s accompanied positive price movements.”

How will the change impact my borrowing capacity?

APRA anticipates that, putting aside other aspects of serviceability assessment, this increase in the serviceability buffer will see the typical borrower experience a 5% drop in their maximum borrowing capacity.

Caylum says these changes are relatively minimal compared to previous restrictions but adds that “buyers in the market for a home or investment property may want to consider reviewing their borrowing capacity to ensure they meet APRA’s new stress-testing regime, and can still make an offer backed by confidence in their financial situation.”

Will there be further changes, and how can I prepare?

While the change to lending rules remains small comparative to previous restrictions, APRA hasn’t ruled out the possibility of future changes, stating it would “continue to closely monitor risks in residential mortgage lending, and can take further steps if necessary”.

Caylum says this is the right time for existing borrowers to review their finances.

“With the recent rise in property prices across Perth, we’ve seen many owners benefit from an uplift in equity, which has put them in a stronger position to refinance to more favourable rates or even progress with plans where they previously couldn’t, especially given the low interest rate environment.”

“All in all, this is a good reminder to borrowers that our lending capacity can be influenced by external factors that aren’t always within our control, so we have to take advantage of these opportunities while we can,” he said.

Want to book a free review of your loan? Fill out the form below and a member of our team will be in touch.


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1  https://www.apra.gov.au/news-and-publications/apra-increases-banks%E2%80%99-loan-serviceability-expectations-to-counter-rising

2 https://www.corelogic.com.au/sites/default/files/2021-09/211001_CoreLogic_HomeValueIndex_Oct21_FINAL.pdf


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