What does APRA's new rule mean for the average home loan?

author-avatar By
on October 07, 2021
What does APRA's new rule mean for the average home loan?

ANALYSIS: APRA's bump in the serviceability buffer could mean you're unable to borrow as much money as before.

A colleague said to me the media hype around Wednesday's news is probably going to cause a bigger stir in the property market than the actual APRA announcement itself. 

Indeed, the bump in what's called the 'serviceability buffer' from 2.5% to 3.0% hardly seems like a big deal, but the prudential regulator estimates it will reduce borrowing capacity for the average borrower by about 5%.

So, let's set a few things straight.

What on earth is a serviceability buffer?

A bank will look at not only payslips, bank statements, savings and your existing debts - it will also do some 'quick maths' to see if you can still afford to make your home loan repayments should interest rates rise significantly.

Banks make this assessment using a 'serviceability rate', which is essentially a hypothetical higher interest rate banks use when judging your ability to meet the repayments.    

A serviceability rate could be one of two things - the bank's minimum 'floor' rate or its advertised home loan interest rate plus a 'buffer'. Whichever is higher will generally be used as the serviceability rate.   

Since 2019, banks can set their own floors - typically around 5% - while APRA's new recommended buffer is 3.0% above the advertised rate.

The buffer is to ensure you can afford not only the advertised interest rate, but withstand any potential rate rises as well.

If we look at the Commonwealth Bank example below, its 'minimum floor' in June 21 (5.25% p.a.) is actually lower than its standard variable rate (4.55%) plus APRA's previous 2.5% buffer.

CBA_APRA.png

In this case, a customer applying for a Commbank loan at the standard variable rate of 4.55% p.a. would be assessed at a serviceability rate of 7.05% (4.55% + 2.5% buffer), because it is higher than the 5.25% floor rate.   

Under APRA's bigger buffer of 3%, this serviceability rate would be even higher at 7.55%. 

Source: CBA

What does it mean for the average home loan?

For new loans, it will probably mean you can borrow less money.

APRA estimates it will drop borrowing power by 5%. On a $400,000 home loan under the old rules, that could drop your borrowing power to $380,000.

Say you have a 2.00% home loan - the new buffer of 3.0% means banks could assess your ability to repay based on a 5.00% interest rate. 

On a $400,000 home loan over 30 years, that would result in a monthly payment of $2,147 per month.

Frankly that repayment sounds pretty high, especially in today's low interest environment. 

Does it affect existing home loans?

Once you've got your foot in the door of the nightclub and past the thick-necked bouncer, you're pretty much free to enjoy a drink.

Existing home loans are likely to be less affected or even unaffected by the changes, because the bank has already assessed your ability to pay off the home loan satisfactorily. 

However, where existing home owners could run into a bit of strife is when it comes to refinancing.

Any refinancing will likely be assessed with the new buffer in mind.

Though with the way house prices have performed, many home owners would have likely experienced strong capital growth, and hence built up sizeable equity, which takes some of the sting out of refinancing.

What if I'm a first home buyer?

First home buyers may now have a harder time borrowing as much as they might have done in the past, or satisfying the bank they can even get a home loan.

As a first home buyer you're the young ruffian in the nightclub queue who wore trainers to a fancy club.

"No trainers!" the bouncer says.

Your deposit may get you less than it did before.

However, if lending, wages, and debt-to-income data is anything to go by, most home buyers don't totally over-leverage themselves, so the 50 basis point rise in the buffer might not totally be the end of the world.

You might just have to temper your expectations a touch, especially if you're in Sydney or Melbourne with super-high home prices.

Would this actually help with housing affordability?

In the grand scheme of things, this is a fairly minor adjustment. Thinking back to what my colleague said yesterday, the hype around the announcement is probably more influential than the change itself.

However, APRA has said it is reviewing other levers it can pull to promote financial stability, which could collectively cool the housing market.

The main criticism however is that this lever doesn't really promote 'affordability', but rather disintegrates 'accessibility', especially for first home buyers who naturally borrow more the first go around to get into the market.

Investors and owner occupiers already in the market will be less affected because they can use the equity from their existing home to help fuel any subsequent home purchases.

While APRA said the latest change is designed to cool investment lending and promote financial stability, the majority of the surge in lending in 2021 has been to first home buyers and owner occupiers.

However, there has been a slight pullback in loans to these demographics as a natural reaction to home prices increasing strongly.

An amusing anecdote to end 

New Zealand has generally gone much harder in addressing housing affordability.

Prior to its Reserve Bank tightening investment lending in March this year, CoreLogic NZ figures from January show 30% of all new lending in that month went to investors - a 15-year high.

Investors piled in before the changes took effect.

It appears any looming legislation could pull forward demand before it spooks the market.

Affordability, or at least accessibility, for first home buyers could get worse before it gets 'better' - if it does at all. 


Advertisement

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWS
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWS

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
NO ONGOING FEES
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
NO ONGOING FEES

Yard PAYG Home Loan (Principal and Interest) LVR ≤ 80%

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of August 7, 2022. View disclaimer.


Image by Bailey Rytenskild on Unsplash



Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree
to the Savings Privacy Policy