To further improve the quality of lending, the Australian Prudential Regulation Authority (APRA) will be increasing interest rate buffer from 2.5% to 3.0%. A home loan interest buffer helps lender know if the client would be able to pay if the interest rate increases. Interest rates changes from time to time so it’s a bit risky for the lender to approve the loan of a client who would be unable to afford an interest rate increase.
Authorised deposit-taking institutions will now take into consideration the borrower’s capacity to repay their loan at the rate it was advertised, as well as at a rate at least 3.0% above the advertised loan product rate.
The reason APRA has increased the minimum interest rate buffer is to reflect the “growing financial stability risks from ADIs’ residential mortgage lending” and because in the recent months they have noticed an increase in the number of heavily indebted borrowers.
If borrowers wouldn’t be able to repay their home loan obligations, it will cause a negative stir with the lenders and the economy on the macro level.
Is it getting harder to get a home loan?
Buying real estate is already a challenge for first-time buyers, as home prices are so high in most parts of the country. Unfortunately, an increase in the minimum interest rate buffer raises the bar even higher. Of course, this will prevent some potential buyers from buying the property they want to buy.
However, keep in mind that the increase in the minimum interest rate buffer for mortgage applications is just minimal. The buffer used to be 2.5%, but now it has increased from 0.5% to 3.0%. Many first-time homebuyers can cope with this change, and some lenders have already raised their serviceability floor rate.
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