Property in Australia has been running hot. In the last year, the average value of houses has increased by more than 20% due to interest rates dropping at the height of the pandemic. It has meant that many borrowers have been borrowing over 6 times their income and mortgages have become bigger than ever before. If rates were to change quickly it would mean many borrowers would be under financial pressure creating a housing bubble that does not align with the RBA’s affordability intentions for 2022 onwards.

To prevent a housing bubble burst, APRA has approved a 0.5 point increase on the serviceability test AKA the stress test for borrowers which has come into effect from November 1st 2021.

What is the Serviceability Test?

The serviceability test assists lenders in making decisions about the maximum borrowing capacity. It is designed to ensure when interest rates are increased, borrowers aren’t stressed or financially incapable of paying the higher repayments. By increasing the buffer to 3% APRA is intending to prevent the growing number of large mortgages from being approved. What has not changed is the floor rate with most lenders, which is hovering between 5 and 7% depending on the lender.

This increase has an impact on pre-approved borrowing capacities and people looking to buy a new home. It is recommended that you check in with your broker as for some it has dropped their capacity by roughly 5%.

So how do you increase your borrowing capacity? We suggest you close unused credit cards and unused after pay facilities.

Who does it affect?

The new stress test buffer is intended to have a greater impact on investors looking to buy an additional property as they are more likely to be stretching the limits of their lending capacity.

However, it can affect all potential new home buyers as there are no exemptions in applying the stress test. According to market research though, only about 8% of borrowers utilise their full borrowing capacity when applying for a home loan. It may also adversely affect first home buyers as it will be harder to satisfy lenders’ expectations.

Why have they chosen to increase the buffer?

The serviceability buffer is considered to be a fairly minor adjustment in the grand scheme of things and the biggest critique of this move is that it is not promoting affordability. However, it is less imposing than alternatives such as debt to income regulations which APRA are considering to implement if lenders do not adjust interest rates in the near future.

Additionally, if banks do not impose the serviceability buffer and continue to sign off high mortgages they will receive a fine. So in theory this is a better option than alternatives for new home buyers.

How can I make sure I am still on track?

If you are concerned about these new lending rules and are intending to use the full amount of your borrowing capacity to purchase your new home, get in touch with us at Melbourne Finance! We know that this is a stressful time and we want to ensure you get the best home loan possible and are able to purchase in the area you want to. And if you want to stay up to date with lending changes subscribe to our newsletter.