Changes to loan serviceability could drive opportunity for brokers
What will the latest macro-prudential changes mean for brokers and the housing market?
Recent changes to how lenders have to assess loan applications could drive increased activity and opportunity for brokers. The changes have made the serviceability stress test tougher, which will make it harder for some to borrow what they want, but will also provide more security for both property owners and lenders. Mark Haron, Executive Director at Connective, has broken down what the changes mean for brokers, borrowers, and the housing market.
On 6 October the Australian Prudential Regulation Authority (APRA) announced an increase to the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The change was in response to increasing scrutiny and concern about rising property prices across the country, continuing record low interest rates that can only go north eventually, and an increasing number of Australians going into debt beyond their means in reaction to the first two factors.
This all presents a pretty significant financial risk for our economy, a risk that rightly had to be curbed. It’s APRA’s job to protect Australians and the economy against this type of risk by using levers called macro-prudential regulation, which is what this change is.
APRA has told lenders that by the end of October, it expects them to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that has been used since 2019. The minimum interest rate level lenders use to assess serviceability (also known as a ‘floor’ rate), averaged 5.09% across the major banks in June, 2021.
Who will it impact?
I don’t believe this change will have a dramatic effect on property prices, but anything that makes it tougher to borrow money will definitely have some impact, including creating opportunity for brokers and investors who can act quickly.
Overall, it’s likely to impact investors and those who have pre-approval more than first-home buyers, which might be surprising when the latter need the most help to enter the market. Saving a deposit and stamp duty are much bigger issues than serviceability for first-home buyers. Whereas, investors are more likely to feel the impact of these changes because if they’re refinancing or purchasing a new property assessment of their serviceability capacity flows across all of their debt.
What does the change mean for brokers?
Brokers could see APRA’s action ignite a flurry of activity. It could also create opportunities for brokers to engage with their clients and explain the changes.
The change could spur some people who may have been considering the property market, but were waiting for prices to settle, to be tempted to bring the activity forward to avoid further regulatory tightening. If they have legitimate concerns that this is going to go further, they’ll be looking to try and get into a property or upgrade their property sooner rather than later.
What should brokers do?
- Understand what the changes are, when they come into effect, and how they could impact your client base.
- Revisit and reassess your pipeline of pre-approvals, and work with clients who need to reapply for smaller loans.
- Educate and reassure your clients by talking to them about the changes and what it might mean for them.
- Understand your clients’ plans and discuss the value in bringing decisions forward if possible to add value to them as a truly trusted advisor.
- Download our client email template here to communicate with your clients about
- What the changes are
- How they might impact you
- How I can help – get in touch.
I’m supportive of anything that promotes a sustainable housing market. This is intended to provide more confidence to borrowers, and confidence is integral to creating a sustainable environment. Increasing the minimum floor rate that lenders assess borrowers on creates a tougher test for borrowers, but it’s a test that provides more security for all parties and a more sustainable outcome.
Mark Haron was appointed executive director of Connective in 2006, having previously been the CEO at aggregator FAST. Mark brings a wealth of knowledge across all aspects of mortgage broking and lending. His vast experience and expertise spans operations, sales and relationship management.
He’s an active advocate of the industry and has recently been appointed to the MFAA Board.
His vision for the future of the industry strongly influences the direction that Connective takes in its dealings with broker members and lender partners.