The big lending change (and to avoid it)

New lending standards imposed by the prudential regulator mean that it might be more difficult for some house hunters to qualify for a home loan, though one expert says there are still ways to work around the changes.

The Australian Prudential Regulatory Authority announced that from 1 November it would raise buffer test it applies to see if borrowers can handle future interest rate rises from 2.5 per cent to three per cent.

It means that a borrower applying for a home loan at a two per cent rate today would have their application scrutinised to determine if they could still make the repayments at a five per cent interest rate.

The changes are expected to reduce a person’s borrowing capacity by around five per cent, if their lender is subject to the new rules.

“That would mean if you were previously approved for an $800,000 loan it would now be $760,000,” said Sarah Megginson, senior home loans editor at comparison website Finder.

“$40,000 less is quite a big difference in this market.”

APRA announced that the changes would be implemented from 1 November, though it is understood that many banks have already been tightening their borrowing tests in the wake of the announcement.

“Fixed rate loans have been ramping up over the past few months and that’s also a reflection of these changes – when fixed rates go up your lending power changes,” Ms Megginson said.

House hunters with existing pre-approvals may be able to avoid the changes, but for those considering taking out a loan in November the changes do not necessarily mean they will be forced to slash their budget.

“The important thing for people to understand is that, for now, this applies to banks and not non-bank lenders,” Ms Megginson said.

“A non-bank lender, they often do everything that a bank does, they can provide all different types of credit but they are not a bank. They are a financial institution, a credit union or a building society… They are governed by slightly different rules.”

APRA’s new rules apply to authorised deposit taking institutions or ADIs, while non-bank lenders are still subject to the existing 2.5 per cent buffer.

Shopping around outside the traditional ‘big four’ banks could help a borrower secure the right loan, but it also paid to remember that every lender will assess loan applications differently, Ms Megginson said.

“For instance some credit unions can be friendlier to self-employed borrowers,” she said.

“Depending on your situation, what these changes really remind us is that it pays to shop around.”

Wipe personal debts to increase borrowing capacity

There were other, relatively simple things prospective borrowers could do to improve the chances of their home loan being approved, or to increase the amount they are able to borrow.

This included closing unnecessary credit accounts, like credit cards.

“Another thing people don’t realise is that your personal debts drag down your lending capacity, even if you don’t use your credit limit,” Ms Megginson said.

“If you wipe out that credit card account or reduce the borrowing limit, your borrowing power will increase a lot.”

– BY REALESTATE.COM.AU