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Changes To Loan Servicing Rules


While the Australian real estate market is currently running red hot, APRA have announced new updates to loan servicing rules to safely regulate the growth. 

In February 2021, Mr Gareth Aird – Head of Australian Economics at the Commonwealth Bank – predicted that we were sitting on the cusp of a property boom like Australia had never before seen. So much so, that he anticipated house prices to surge past 16% within the next two years.

“The negative impact that COVID-19 had on Australian property prices turned out to be much more muted than almost any forecaster expected, us included. However, we were earlier than most  to recognise this and revised our call in September 2020, in order to look for a smaller peak-to-trough fall and a decent lift in prices over 2021.”

Needless to say, Mr Aird certainly wasn’t wrong, and the arrival of COVID-19 appeared to be more of a temporary pause as opposed to the cataclysmic hit that was initially predicted. Although it’s changed how and where we live, 2020 saw Australians pocket an unprecedented $110 billion in personal savings. From first home owners to seasoned investors, cashed up buyers who were armed with pre-approvals and sizable deposits helped to ensure that the Australian housing market stood strong in a time of great economic uncertainty. 

However, the end of 2021 is rapidly approaching, and things aren’t showing any signs of slowing down. With limited supply and ever increasing demand, the Australian Prudential Regulation Authority (otherwise known as APRA) have taken steps to help ensure that borrowers were capable of making mortgage repayments if – or perhaps, when – home loan interest rates rise. 

The New Loan Servicing Rules Explained 

The Australian Prudential Regulation Authority is a statutory authority of the Australian Government, and is the prudential regulator of the Australian financial services industry. As such, one can assume that they’ve been keeping a watchful eye over the nation’s current property boom, and the potential fallout that may follow for those who have overstretched themselves financially. 

As such, this week APRA made the announcement that it has increased the minimum interest rate buffer that it expects banks and other lending institutes to use when assessing the serviceability of home loan applications. 

At the moment, the minimum interest rate buffer on home loan applications is 2.5% points. In November 2021, this is set to increase to a minimum of 3%, and is a tentative step by the regulator to cool credit growth right around the nation. APRA estimates the small change to Australia’s loan servicing rules will reduce the average person’s maximum borrowing capacity by around 5%. 

APRA’s decision, which reflects growing financial stability risks from residential mortgage lending, is supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission. In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission.

There have been an increasing number of concerns that too many borrowers are taking on loans that are ‘too big’ for them, or are being given access to loans despite a high debt to income ratio. However, even with record low interest rates and increasing levels of lending at high multiples of borrower income, most banks and lending institutes have made no changes to their buffers and relevant loan servicing rules – until now. 

Taking The Stress Out Of Home Loans

The big attraction of buying your own home is just that – it’s yours, once you’ve paid back the banks of course. Apart from having somewhere to live, the quest for home ownership is also about having a long term investment strategy. If we’re looking at it from the viewpoint of decades instead of months, generally house prices do rise, and so does the value of your investment.

With a background in banking, finance, business development and project management, there’s no better advocate to have on your team than Nikki Berzin. As a fully qualified mortgage broker and director of Cherry Lending & Finance, Nikki is passionate about all things finance, and empowering her clients with the tools to hit their property goals is what she does best.

If you’re looking to get into your first home, purchase an investment property or even want to look at your options for refinancing, the first step is starting the conversation. Get in touch with Nikki today, or call her directly on 0427 374 155 to bring your mortgage dreams to life.

Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.  Subject to lenders terms and conditions, fees and charges and eligibility apply.

Credit Representative 499652 is authorised under Australian Credit License 389328.