Borrowing to invest
There’s no doubt that lenders have tightened their mortgage purse strings following new rules brought in earlier this year to combat so-called “heightened risk” in the housing market.
The rules, announced recently by the Australian Prudential Regulation Authority, especially impact those borrowers considering buying a house with an interest-only loan.
That’s because the APRA-mandated changes dictate that banks must limit interest-only lending to 30 per cent of total new residential mortgage lending.
But that’s not all. The stricter rules also require that banks get tougher on lending to borrowers taking loans close to the value of the property they are purchasing.
In addition, they oblige banks to keep a lid on investor lending at below 10 per cent growth per year, in a bid to cool investor speculation in the market.
Housing bubble fears
The changes didn’t come out of thin air. On the contrary, they were a considered response to fears that the housing market, especially in Sydney, was at risk of overheating.
As APRA warned recently: “The new regulations are part of an ongoing response to what APRA describes as an environment of high housing prices, high and rising levels of household debt, slower income growth and historically low interest rates”.
Indeed, Price Waterhouse Coopers writes that the changes were targeted at moving “lending away from high-risk categories, felt by some to be fuelling the house price increases across Australia”.
The impact on borrowers
The changes are a big deal for prospective homeowners or investors because a large percentage of mortgages, before the new rules, were interest-only.
In fact, according to media reports, around 40 per cent of CBA and Westpac loans were interest-only.
NAB and ANZ were reportedly a little less exposed, at 38 and 37 per cent respectively.
Given APRA’s stricter rules, borrowers looking for a low deposit home loan, often known as a “low doc loan”, or hoping to make interest-only repayments, might find it extra tough to get approval.
But as financial comparison site Mozo points out, the result of the altered lending environment means banks are now more focused on finding quality borrowers.
“If you’re in the market for a home loan, it’s more important than ever to save up a deposit and have your finances sorted before applying,” it urges prospective buyers.
Other key tips include establishing credibility with a strong work history, providing all relevant supporting documentation, and checking your credit history to make sure there are no defaults or negative repayment histories.
If you fail at the bank, there is also the option to approach a non-bank lender. While APRA regulates deposit-taking institutions, like the four big banks, it has no power over non-bank lenders, which haven’t needed to get tougher with borrowers.
Such lenders are likely to be more expensive than a bank, but they can offer loans that the banks aren’t allowed to make available due to the APRA crackdown.