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Concerns grow around harsher mortgage lending crackdown

Aerial view of a leafy suburb in Adelaide
APRA is considering further tightening lending laws to help cool the housing market. (Source: Getty)

First home buyers may face an even tougher time trying to crack into the Aussie property market.

The Australian Prudential Regulation Authority (APRA) said it was considering further steps to control the major banks’ lending to higher risk borrowers.

APRA, along with the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and Treasury, came together to take a similar step last month.

The three bodies agreed to tighten lending restrictions in October, with borrowers now forced to prove they can pay back their mortgage if interest rates increase 3 per cent. Previously, they had to be able to cover a 2.5 per cent increase.


Now, APRA is considering going even further. But is this a good thing or a bad thing? And what does it mean for you?

Here is a breakdown.

What is the mortgage stress test

Analysis from found for a family of four with an annual household income of $150,000, their maximum home loan borrowing power could decrease by an estimated $46,900, under the new 3 per cent test.

For a single person on an annual income of $100,000, the maximum they can borrow could drop by an estimated $34,900 under the new increased mortgage stress test.

Part of the reason for this change was to help cool the Aussie housing market which has skyrocketed in the last year.

The average price of a home has increased by around 20 per cent so far this year, and while the pace of growth is expected to slow down, the overall market is unlikely to drop.

How will this help cool the housing market?

The measures are meant to help in two ways. Firstly, if the maximum borrowing capacity for everyone is lowered then everyone will have less to spend on buying property.

Secondly, there have been concerns over borrowers’ ability to repay their loans. This is because ultra low rates coupled with incentives allowing for smaller deposits has led to some taking out large loans that they can only repay now while rates are so low.

Should rates go up, and all those people default on their loans, it could see many land themselves in negative equity with the potential for a major property crash.

A new survey found two-thirds of Australians believe a full one percentage point rise in interest rates would put pressure on their finances.

The report commissioned by the Finance Brokers Association of Australia found around half of the 1,000 people surveyed said they would need to look at refinancing their home if their mortgage repayments went up $300 a month.

When asked whether they would be able to meet such an increase, 57 per cent answered "not at all".

"Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low," the association's managing director Peter White said.

"One per cent is not a large increase. My message to Australians is that we must be better prepared."

What are the new regulations being considered?

In an information paper, APRA said it was considering macroprudential tools to help limit high-risk loans, as well as loan applications from borrowers looking to borrow a large portion of the value of the property.

In a letter to the banks, APRA chain Wayne Byres said the policies the regulator is considering are designed to quickly put an end to “emerging risks”.

“Unlike our day-to-day supervision of individual entities, macroprudential policies allow us to target risks to the entire financial system; whether it be curbing excessive risk-taking in a buoyant market, or conversely encouraging investment and economic activity during a downturn,” Byres said.

“APRA has a wide range of tools it could potentially deploy in such circumstances. Today’s paper is intended to give financial industry stakeholders a better understanding of the factors APRA considers in making decisions to use these tools, the types of macroprudential measures APRA could deploy in the future, and how they might be implemented.”

So, while APRA has not yet implemented these tools it is clear that the regulator has growing concerns about the rising property market and simultaneous rising household debt, Alex Lawler, lending support manager at WLTH said.

“The APRA has introduced macro-prudential measures to manage systemic risk in the financial sector. This move comes with the release of data revealing household debt is higher than income,” Lawler said.

“While Australia's overall lending standards have, for the most part, remained sound, there have been signs of some increased risk-taking.”

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