APRA are changing some of the lending rules - what does it really mean?

The media is reporting the news that APRA - the bank regulator - is forcing some changes onto banks to maintain "responsible lending standards". Undoubtably interest rates being so low, government incentive schemes and general access to credit have resulted in huge property price growth pretty much around the nation & the thought is to both maintain good lending standards (avoid a crash or too much mortgage distress) as well as curb the price growth a little.

So what does it mean?

Part A - lets call this the increase in the buffer rate to 3% from previously 2.5%. Essentially, lenders test that you can afford the loan you're applying for at an interest rate which is now 3% higher than the actual rate you're going to be paying. ie: you're approved for 2.24% pa - they're testing you at a minimum of 5.24%pa (or if the lender has a minimum floor rate such as ING who test at a minimum of 6.1%pa then that higher rate). This would assume that if interest rates rose by 3% you should technically still be able to afford your mortgage.

What this means in reality is for average borrowers their "capacity" is reduced around $50,000, so you can borrow around $50,000 less than you could have previously. What is good to think about here is not many borrowers borrow their absolute maximum.

What it doesn't mean -

• This does NOT mean you are automatically having your interest rate increased

• It does not mean you have to have an additional 5% deposit (unless of course the reduction in borrowings means you need extra cash to meet the purchase price you're aiming for).

Both of which are questions we have received.

Part B - the potential cap to a "debt to income ratio" of 6 x your total income. That means you could be limited to borrowing 6 x your income, and by that we mean income as it is accepted by the bank.

Its worth making this distinction because lenders have a system of scaling and discounting income - some examples:

• Income you receive from your rental property is scaled back to 60-80% LESS the costs of running your property.

• Income such as family tax benefit is only accepted for children under a certain age with most lenders

• And income such as single parenting pension, private maintenance agreements etc may not be accepted at all.

So you could have a circumstance where your accepted income is substantially reduced from what you actually receive in the bank and you can't qualify for the loan any more. It is what it is - we need to work with it.

It also means your total debt is considered in the ratio - limits on credit cards, hecs, zippay car loans etc all get included.

Now - you may say, 6 x your gross annual salary is a lot! And I don't argue that point - but lets put this into perspective.

If the average income in Sydney is $80,000 and you can borrow 6 x this amount - thats a loan of $480,000 - what does that buy you in Sydney now? Further to this lets assume this person is a nurse and she has been encouraged to buy a car in a salary sacrifice arrangement which is really common, has a small limit on her credit card and a little HECS debt - her borrowing capacity can quickly reduce by all of those limits.

So to my mind it's a tough barrier that disproportionately impacts certain borrowers more than others; single people, single parents, new uni graduates, and investors - more on the last later on.

Its worth noting - the cap has actually been in place in a fashion for a while now, but we have been able to mitigate it - for example; it is on the lenders radars but it can be mitigated for a lower lending percentage, or if you have a good cash surplus after your repayments and living expenses, or you have a means to reduce it such as selling properties. A hard cap could remove this flexibility. Additionally, there are some lenders who aren't subject to the hard limit - and we hope they won't be as this will be the avenue for our singles to buy through.

Back to the topic of investors - while investors are seen as the big scurge that has forced price growth, what we lose sight of is that the private rental market is a necessary part of supporting those who need or want to rent. I had a call today from someone who's kids want to move out for the first time and they cannot find a rental because there are so few now (after previous regulator changes) and the competition is so tough for those that are available. Similarly, if you are one of those who can't borrow as much as you'd need due to the type of income you receive, then you have little choice but to rent - and - if the competition is as tough as I am hearing to win a property you may have to pay 12 months rent in advance, how is this a better situation? I am hearing of rental price growth of $50 / week overnight - this really is so hard for someone starting out and trying to get ahead. Imagine trying to save a deposit in these circumstances?

The biggest issue with price growth is actually the lack of properties to buy - supply and demand, demand right now is outstripping supply & there isn't really anything on the horizon that will help with this, and I am sorry to say I think the changes now are going to miss the mark.

The further issue that we haven't even touched on - you may already have a loan but the interest rate isn't favourable, you're having no trouble paying it & of course even easier to pay with a reduction - but you no longer meet the criteria for a refinance - we call this circumstance rate jail, stuck with a loan that no longer suits you and nothing you can do to help.

If there is any upside to this its that as a broker we are privileged to sit above all the different policies, and find the one who would allow that purchase or refinance.