Interest Rate Buffers Are Going Up, To Bring Debt Levels Down

The Australian Prudential Regulation Authority (APRA) announced that it will increase the interest rate buffers banks use to assess the serviceability of home loans from 2.5% to 3%. The higher buffer rate will be in place from the end of October 2021. It is applicable only for authorised deposit-taking institutions.

How Much Is The Increase?

Banks currently apply a buffer of 2.5 percentage points to your interest rate when calculating serviceability. With the new lending policy, banks will be required to add a buffer of 3 percentage points above the interest rate. The change will not have any impact on the interest rate, but it is estimated that the increase will reduce borrowing power by around 5%.

Why Did APRA Increase Home Loan Buffers?

Due to record-low interest rates and booming house prices, APRA expects household debt to exceed household income for the foreseeable future; therefore, the regulator increased serviceability buffers to minimise the risk to the economy.

What Happened To DTI?

Widespread speculation that a cap on debt-to-income (DTI) ratios was imminent proved inaccurate, as APRA said a cap would be difficult to monitor and banks could charge higher interest rates for borrowers with a high DTI. However, APRA has not ruled out adding a DTI limit in the future.

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How Does It Affect You?

From November onwards, banks will calculate whether you could afford to repay your home loan if interest rates rose by 3 percentage points above the current rate. For example, if you are applying for a home loan at a 2% interest rate, the bank will calculate whether you can make repayments with a 5% interest rate. If you can’t make the repayments, your application will be denied.

The change is most likely to affect investors, who are known to borrow at higher levels of leverage and also have more existing debts than home buyers. First home buyers looking at the cheaper end of the market may also be affected.

Get into the property market before the changes take place. Our mortgage brokers can help you purchase a home using present buffer rates. We also have non-bank lenders on our panel that will approve you with lower interest rate buffers.

Call us on 1300 889 743 or enquire online today.