Why home buying budgets may need a rethink

When you apply for a mortgage, the bank is required to check how well you could manage the loan repayments if interest rates rose higher. This makes sense because rates are likely to go up and down in the time it takes to pay off your mortgage.

Prior to 6 October 2021, banks typically ‘stress tested’ loan applications by assuming a rate buffer of 2.5%. So, even though you may have applied for a loan with a rate of 2%, the bank checked to see if you could handle the repayments if the rate rose to 4.5%.

What APRA has done, is to raise the stress test benchmark to 3%. This means your lender will now check how well you’d manage if home loan rates rose to 5% – potentially more than double the current rate on some mortgages.

There is sound logic behind this move. APRA is concerned that in the June 2021 quarter, over one in five new loans were for more than six times the borrowers’ income. That’s a solid amount of debt. And it’s happening because property values have been racing ahead at record rates – climbing 20% nationally in just the last year, while wages have barely moved at all, increasing by a meagre 1.7% over the 12 months to June 2021.

The 0.5% increase in APRA’s stress test may be small, but it could have big implications if you’re a home buyer. According to comparison site Canstar, the 0.5% jump in banks’ serviceability testing may mean a borrower on an income of $59,800 has their borrowing power cut by $70,000. A higher income earner, earning say $90,500 annually, may have their borrowing capacity trimmed by $30,000.

This makes it worth a call to your lender or mortgage broker especially if you’re relying on a pre-approved home loan to buy a property, or if you plan to bid at auction any time soon. You want to be sure you don’t overstep your borrowing limits.

The impact of APRA’s new stress test rate may be that property price growth cools slightly, but that’s not guaranteed.  Lowering the amount home buyers can borrow, could boost demand for homes in more affordable price brackets. Time will tell.

What matters is that you speak with a home loan expert before signing on the dotted line to buy a home. The last thing you need is to find you can’t secure the finance needed to fund the purchase. That could see you having to turn to a more expensive lender, or worst case, losing your deposit if you have to walk away from the deal altogether.  

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.