Knowledge Hub

Matthew Hughes, Managing Director at Capital Property Advisory

December 01, 2021

Much has been said about the Australian Prudential Regulation Authority’s (APRA) recent increase in the interest rate buffer banks must use when assessing loan applications.

Basically, banks now need to assess borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate – an increase over the previous rate of 2.5 percentage points.

In a financial climate where there is an expectation that household income growth will not keep pace with household credit growth, APRA has assessed the balance of risks and concluded that stronger serviceability standards are required. Its objective is simply to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well equipped to service their debts under a range of scenarios.

But how does this affect our own market here in Perth?

Firstly, it is important to note that any impact is likely to affect investors more than owner-occupiers because investors tend to borrow at higher levels of leverage and may have other existing debts, to which this new rate would also be applied.

Secondly, APRA itself has stated that it expects the overall impact on housing credit growth flowing from the change to be modest, in that the new rate will reduce the maximum borrowing capacity for the average borrower by only about 5 per cent.

Most notably for WA, however, is that while nationwide around 10 per cent of borrowers choose to borrow at full capacity, we are much more conservative, with our average level of borrowing relative to income being considerably lower than our Eastern States counterparts.

Consequently, the APRA change is likely to have little impact, if any, on the Perth market or on the approval of lending applications.

For more information or if you have any questions, contact the team today.