Australia’s banking regulator, APRA, has made a major intervention in the mortgage market, by instructing lenders to take a different approach in the way they assess home loan applications.

Previously, lenders would add a buffer of at least 2.50 percentage points when assessing your ability to repay a home loan. So if you were a first home buyer who applied for a mortgage with an interest rate of 2.15%, lenders would assess whether you could repay the loan if the interest rate increased by 2.50 percentage points – i.e. from 2.15% to 4.65%. 

Now, lenders have increased the buffer to 3.00 percentage points. So that hypothetical 2.15% loan will be assessed at 5.15%.

APRA expects this change will reduce a typical borrower's maximum loan size by about 5% (e.g. from $700,000 to $665,000). But that’s just an average. Some borrowers will be impacted more – potentially, they might no longer be able to qualify for a loan. Conversely, other borrowers won't be affected at all.

In a moment, we’ll explain why. First, though, we’ll explain why APRA has made this intervention.

The regulator wants to keep the financial system safe

During 2021, property prices have been rising fast, forcing buyers to apply for larger loans.

This poses an increasing risk to Australia's financial system, according to APRA chair Wayne Byres.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future," he said.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building."

Why some borrowers won’t be affected by the new rules

As mentioned earlier, some people’s borrowing capacity will not be affected by the new rules.

That’s because, when you apply for a home loan, lenders don’t just add a buffer to whatever interest rate they offer you. They also apply an interest rate floor, which, for many lenders, is 5.25%. If the ‘floor’ rate is higher than the ‘buffer’ rate (i.e. the interest rate with the buffer added on), lenders assess you at the higher ‘floor’ rate.

For example, take our hypothetical first home buyer applying for a loan with an interest rate of 2.15%. The ‘buffer’ rate would be 4.65% under the old system and 5.15% under the new system – both of which are lower than the 5.25% ‘floor’ rate. So, under both systems, the first home buyer would be assessed at 5.25%. As a result, the first home buyer’s borrowing capacity hasn’t changed.

The new rules are more likely to affect investors than owner-occupiers. That’s because investors get charged higher interest rates, so their ‘buffer’ rate is more likely to be above the ‘floor’ rate than with owner-occupiers.  

Why it’s important to work with a leading Sydney broker 

Please note the scenario mentioned above is purely hypothetical. Your situation might be different, depending on your personal circumstances and the lender you use.

Either way, what’s clear is that it’s now become harder for some people to get a big loan, or indeed any loan at all.

As a result, it’s become more important to use an expert mortgage broker, who can maximise your chances of getting approved for a loan.

Want one of the best finance brokers in Sydney to guide you through the new lending landscape? Eventus Financial is a multi-award winning mortgage broker with over 290 five-star Google reviews. Schedule a no-obligation consultation with Alex to find out how we can help you with your home loan.