APRA\u2019s scrapping of the 7 per cent \u2018stress test\u2019 buffer on home loans will effectively see a 9 per cent increase in borrowing capacity for owner-occupiers, which will rise to between 13 and 14 per cent if the RBA undertakes two interest rate cuts before the year is out, according to RiskWise Property Research.<\/p>\n
CEO Doron Peleg said that with the existing ultra-low interest rate and two interest rate cuts projected by the RBA, APRA\u2019s 7 per cent \u2018stress test\u2019 was a major barrier for borrowers in an already highly regulated and scrutinised lending environment.<\/p>\n
However, with the stress test reduced or removed, it would mean that if the interest rate for owner-occupiers was about 3.75 per cent, they would pay about 6.25 per cent, which would create a 9 per cent borrowing capacity.<\/p>\n
\u201cIf there are no interest rate cuts the increase in borrowing capacity will be an increase of around 4-5 per cent for investors and for owner-occupiers about 9 per cent,\u201d Mr Peleg said.<\/p>\n
\u201cHowever, if the RBA cut rates twice, we will see an increase of around 9 per cent for investors and potentially 13-14 per cent for owner-occupiers.<\/p>\n
\u201cThis will be a major boost to the market, especially as now the number one risk has been removed thanks to a Coalition win and the elimination of the threat of taxation changes to negative gearing and capital gains tax.\u201d<\/p>\n
APRA\u2019s introduced a 7 per cent \u2018floor assessment\u2019 to the ADIs in December 2014 \u201cto examine the resilience of the largest banks, individually and collectively, and to explore the potential impacts of grim and challenging periods of stormy economic weather,\u201d according to APRA chairman Wayne Byres in July 2018.<\/p>\n
Mr Peleg said while at that point of time this instruction to the ADIs was, indeed, required, this conservative approach could not be applied to the lending landscape of 2019.<\/p>\n
\u201cIn 2014, there was a tangible risk that in the foreseeable future interest rates might increase materially,\u201d Mr Peleg said.<\/p>\n
\u201cFurther, a high proportion (44 per cent) of the loans were interest-only and 12 per cent of the loans had LVR of 90 per cent.<\/p>\n
\u201cThat, alongside loose controls over the accuracy of the information provided by prospective borrowers in loan applications and reliance on the HEM to assess household expenses, provided justification for APRA\u2019s instruction.\u201d<\/p>\n
He said the banks also applied a slightly higher rate of 7.25 per cent to ensure they were above the minimum threshold.<\/p>\n
However, Mr Peleg said since then the lending environment had completely changed and APRA\u2019s requirement had become ultra-conservative.<\/p>\n
\u201cInterest rates are now very low with a very high likelihood of additional cuts by the RBA, and no signs of increases in the foreseeable future,\u201d he said.<\/p>\n
\u201cA low interest rate environment has, effectively, become the \u2018new normal\u2019 in Australia.<\/p>\n
\u201cLoan applications are heavily scrutinised, lenders are applying more conservative credit policies, the proportion of interest-only loans is now low with only 16 per cent of the new loans (December 2018) being interestonly and 7 per cent of loans at 90 per cent.\u201d<\/p>\n
RiskWise undertook a case study of a scenario involving a married couple, who both receive average weekly earnings at their full-time jobs, and have two children.<\/p>\n
The couple require a loan of 30 years and their only expenses are either HEM or HEM X 1.5, and the assumption is they have no credit card repayments and other expenses.<\/p>\n
\u201cOur analysis showed that due to the scrutinising of loan applications and by applying the effective 7.25 per cent \u2018stress test\u2019 this materially reduced their borrowing capacity by 33 per cent,\u201d Mr Peleg said.<\/p>\n
\u201cThe borrowing capacity of $698,000, based on the HEM and ‘floor assessment’ of 7.25 per cent, is equivalent to HEM X 1.5, with an interest rate of 2.87 per cent.<\/p>\n
\u201cAs a result, the couple would have to totally re-assess their entire purchasing strategy.<\/p>\n
\u201cSo APRA\u2019s change is equivalent to the required reduction in the floor assessment that has the right balance between having a meaningful impact, while still having good risk-management practices.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
APRA\u2019s scrapping of the 7 per cent \u2018stress test\u2019 buffer on home loans will effectively see a 9 per cent increase in borrowing capacity for owner-occupiers, which will rise to between 13 and 14 per cent if the RBA undertakes two interest rate cuts before the year is out, according to RiskWise Property Research. CEO […]<\/p>\n