What you need to know about the proposed changes to lending

by Oscar Pople – Investment Manager

The Reserve Bank of Australia (RBA) has stated that increasing interest rates is not the answer to cool the housing market, instead suggesting that reducing high debt to income loans is the more sustainable method.

Currently some homeowners around Australia have been leveraging more than six times their annual income to get into the property market, resulting in prices soaring and now, subsequently, fears of unsustainability and unaffordable housing for many.

While house prices across the country are at all time high prices household debt is not quite at record highs. This is largely a result of Australia’s lockdown and border closures, as home owners have so far been able to use their savings to pay down mortgages instead of overseas travel. However, with the end of lockdowns imminent and the borders set to reopen soon after it is expected that Australians will be redirecting those savings that have been paying down mortgages into other activities such as travel, which will increase household debt levels. On top of that is the demand from overseas buyers, once borders do open – which could see prices continue to climb further.

If financial regulators do indeed clampdown on credit, it is expected to begin early-mid 2022. The most likely target for regulators is the debt to income ratio for households, which they will seek to reduce before interest rates do eventually increase. The other measure they may look to address is the serviceability buffer on mortgages, which is an amount added to current interest rates when calculating if someone can service a loan. The serviceability rate tests a prospective borrowers’ capacity to repay a loan at a higher interest rate. Currently the most common serviceability buffer is 2.5%. CBA have already increased their serviceability buffer, with their serviceability rate now 5.25% compared to the previous 5.1%.

What does this mean for home owners now or prospective buyers looking to enter the market?

With tighter lending restrictions on the way and interest rates not getting any lower, it may be worth considering refinancing your loan now and fixing all or a portion of that loan to capitalise on the lenient lending and low interest rate environment we find ourselves in now.

If you would like to speak to a mortgage broker at Sequoia to discuss your situation, please get in touch on 02 8114 2222.