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The banking regulator intends to revise borrower assessment guidelines, but what does this mean for investors and their portfolio? According to the experts, the changes could potentially mean great things.
Detailed in a letter sent out to lenders and other authorised deposit-taking institutions (ADIs), APRA announced that it is looking to stop advising ADIs to assess if borrowers can make repayments on loans using a minimum interest rate of 7 per cent. Instead, it is looking to allow ADIs to make their own minimum interest rate.
Additionally, APRA also proposed that the serviceability assessments by ADIs use an interest rate buffer of 2.5 per cent.
As the previous guidelines were established in December 2014, APRA chair Wayne Byres said the economic environment had evolved since then.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk. Although many of those risk factors remain – high house prices, low interest rates, high household debt and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor,” Mr Byres said.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.”
Mr Byres added that the announcement did not mean that lending standards were being relaxed, but the state of the current interest rate environment does not need an interest rate floor of 7 per cent.
“The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.”
The proposal is open to a consultation period, which will close on 18 June.
Speaking with Smart Property Investrment, Sze Chuah, director of MLS Finance, called the announcement “the absolute biggest news for finance in three years”.
“That’s the thing that’s been killing borrowers, and killing borrowers’ serviceability over the last few years, that despite the rates being as low as mid 3s onwards, the assessment rate is as much as 4 per cent higher,” Mr Chuah said.
“I wouldn’t imagine any lenders would have any issues with that because, again, it’s going to allow them to lend out more than what is possible under the current regime. It’s going to be massive.”
He claimed that property investors would, in most cases, be able to borrow more under the new changes.
“If these proposals are adopted, it’s going to mean, for many borrowers, it’s going to extend their borrowing capacity, and it’s the defining factor for a lot of investors, especially with investors with existing portfolios, or they have existing debts. It’s going to be how the existing liabilities they have, their existing commitments are going to be stress-tested,” Mr Chuah said.
“Instead of adding 2 and a half per cent onto the existing interest rates of the existing debts, it might be taking it at actuals, or a smaller kind of buffer, then it’s going to be an even bigger impact.
“I think the devil’s going to be in the detail, but at first glance, this is the first time in three or four years that the assessment rates have been talked about likely dropping in most cases rather than being tighter.”
While this announcement is not the end of the age of tight finance outright, Mr Chuah said this announced proposal would be the start of it.
“I don’t think, all of a sudden, the floodgates are going to open, but it’s starting to look like a few changes, with interest-only, the announcement of interest-only caps being officially lifted by APRA just before Christmas… and with all predictions of cash rates dropping over the next immediate short-term, continues competition for refinance, rebates, purchase rebates, it being continuing to be a low-interest rate environment, I think it’s starting to look that way,” he said.
“Bit by bit, especially in view of where the property market is at the moment in the major capital cities, you would think that it’s just starting to turn the corner, so it’s pretty exciting.”
Commenting on the proposed changes, Cameron Kusher, research analyst at CoreLogic, agreed with Mr Byres’ sentiments that lending conditions had changes since 2014 when the current guidelines where introduced.
“We have seen the reintroduction of differential mortgage pricing for owner-occupiers, investor and interest-only borrowers,” he said.
“Lenders have become much more focused on responsible lending requirements and, as a result, they are asking borrowers more detailed questions about their financial positions and moved away from using the HEM Index.”
To highlight the changes, Mr Kusher compared the repayment percentage now compared to what it would look like under the proposed changes.
Using a hypothetical mortgage of 3.9 per cent, a borrower would be assessed at 7.25 per cent, but under the proposed changes, borrowers would be assessed at 6.4 per cent instead.
“The proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer. Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment,” Mr Kusher said.
While Mr Kusher does not predict the property market bouncing back, he does believe more people would be able to access a mortgage as a result.
“These proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market,” he said.
“Furthermore, these changes may also ease some of the urgency for official interest rate cuts by the Reserve Bank. If housing can provide some additional economic stimulus, rate cuts may be less necessary.
“Should these changes be implemented, it would potentially slow the declines further and may result in an earlier bottoming of the housing market. We currently expect the market to bottom in mid-2020.”
However, he does not believe it will become any easier to get a mortgage.
The Property Council of Australia’s CEO, Ken Morrison, welcomed the change, calling it a timely move by the prudential regulator.
“It makes sense to revisit some of the measures originally put in place at the peak of the housing market. Different markets need different settings,” he said.
“A stable and well-regulated financial system is fundamental to our economic prosperity and it is appropriate that the guidelines for lending standards are regularly reviewed.
“As APRA notes, this is not about easing sound lending standards but recognition that the interest rate environment has changed with interest rates now at a record lows, and likely to remain so, the gap between the 7 per cent floor and actual rates has become quite wide.”