Big changes coming soon to home loan rules

Thousands of Australians who are currently considered not able to afford a home loan are about to suddenly become eligible for mortgage credit.

Home loan eligibility requirements are set to be relaxed, within days, allowing lenders to approve thousands of Aussie loan applicants who are currently unable to qualify for a home loan or who can’t get approved for the amount they want to borrow.

The number of home loans approved by banks and other lenders fell 19 per cent in the 12 months to the end of May according to data from the financial industry regulator, the Australian Prudential Regulatory Authority.

Mortgage industry expert John Kolenda from Finsure said many potential home buyers had been discouraged by “restrictive, complicated and confusing” home loan eligibility guidelines.

Many potential buyers are “disheartened by the scrutiny of the major banks in analysing their expenses and activities” said Mr Kolenda.

And the way lenders assess your living expenses could also change as a new inquiry looks at whether the current method is underestimating average household living budgets.

7.25% mortgage buffer set to be scrapped

Currently banks and other lenders are required to assess all home loan applicants’ ability to repay their loan if rates were to increase to 7.25 per cent. Currently the average home loan rate in Australia is around 4 per cent.

APRA has signalled that it will replace the 7.25 per cent serviceability buffer rate with a new rate set at 2.50 percentage points above the actual loan rate.

Now, APRA is believed to be putting the final touches on new guidelines and will announce the scrapping of the 7.25 per cent buffer rate within days, according to reports in the Australian Financial Review.

For almost 5 years, APRA has required banks to assess loan applicant’s ability to repay a home loan against a rate comfortably above 7 per cent, widely taken by banks and lenders to mean 7.25 per cent.

APRA chairperson Wayne Byres said in May that interest rates are expected to remain low for an extended period of time so the gap between the 7 per cent guideline and the actual rate paid by the borrower “has become quite wide in some cases — possibly unnecessarily so.”

Mr Byers warned that its moves to relax the guidelines “are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards.”

Property market analyst Cameron Kusher from CoreLogic said getting a pproved for a home loans has become more difficult since 2014 “partly because of this serviceability assessment.”

The removal of the 7.25 per cent benchmark “will help some borrowers that can't quite access a mortgage (currently) to get one”.

“Overall … it will mean more people are able to get a mortgage.”

Banks defend household expenses formula

The way banks and lenders assess household living expenses could also change as government regulators scrutinise the formula lenders use to measure a loan applicant’s expenses. Westpac, ANZ, NAB, Commonwealth Bank and other lenders are raising concerns about responsible lending guidelines that impose tougher measures of how much money borrowers need for their everyday bills and living expenses.

Westpac is facing federal court action from the Australian Securities and Investments Commission (ASIC) over how it assesses a borrower’s ability to repay their loan. Westpac, like many other lenders, uses a formula called the Household Expenditure Measure (HEM) to assess the expenses of borrowers. Critics say the HEM can underestimate household living expenses and has led lenders to approve applicants for home loans who may go on to struggle to afford repayments.

Westpac argues that borrowers adopt “a modest lifestyle for a period of time in order to acquire real property.” Westpac has made a submission to ASIC asking the regulator to accept that borrowers make “reasonable lifestyle adjustments (‘belt-tightening’),” to afford their home loan.

The banks are resisting calls to look at how much borrowers actually spend on living expenses instead of applying a formula.

Compare the top home loan products from Australia’s banks, credit unions, building societies and non-bank lenders at InfoChoice.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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