· APRA announces proposal to revise servicing regulations for residential mortgages
· Drop in assessment rates could see buyers benefit from increased affordability
· Election marks end to uncertainty surrounding negative gearing
The Australian Prudential Regulation Authority (APRA) has begun a four-week consultation to revise its guidance on serviceability metrics for residential mortgages in a move that could prove positive for Australian property investors, according to property investment consultancy, Momentum Wealth.
The announcement is the latest in a line of wins for residential property investors, and comes just days after the Liberal’s election success removed the possibility of a short-term change to negative gearing.
APRA’s proposal, outlined today in a letter to authorised deposit-taking institutions (ADIs), includes the removal of a 7 per cent floor on serviceability calculations for mortgages, with APRA instead proposing that lenders assess loans with a serviceability buffer of 2.5 per cent.
The proposal outlines further recommendations for the removal of expectations that lenders should use a buffer ‘comfortably above’ the stipulated rate – a guideline that has led many lenders to raise their serviceability calculations above APRA’s minimum recommendations.
Team Leader of Finance at Momentum Wealth, Caylum Merrick, says the move towards reducing the 7 per cent buffer will help to realign serviceability calculations with current market conditions.
“Under current guidance, we are seeing many lenders assessing loan applications at a floor rate of 7.25%, which simply isn’t reflective of today’s market, especially when you consider that interest rates are already at historical lows with further rate cuts forecast in the near future.”
“If enforced, the proposed 2.5 per cent buffer will help to bring serviceability calculations in better alignment with the current market, and furthermore will ensure serviceability assessments remain relative to future interest rate movements,” he said.
Positive news for property investors
Mr Merrick says APRA’s proposal is welcome news for the lending industry and residential property investors as a whole, many of whom have faced increasing issues in meeting tighter serviceability metrics in recent years.
“In some cases, we’ve seen investors who were once able to pass servicing by over $1000 per month fail servicing by $700 per month due to the elevated floor assessment rate, and this is despite no change to their personal circumstances,” he said.
According to Mr Merrick, a drop in assessment rates could see buyers benefit from a significant increase in affordability.
“For a buyer on an annual income of $80,000, a drop in the servicing rate from 7.25% to 6.40% could see their maximum borrowing capacity rise from $489,000 to $533,000, which represents an increase in affordability of almost 10%, and this is without taking into account the possibility of further rate cuts.”
“Whilst the revisions will impact borrowers differently depending on their individual situation, the proposed changes could provide a much-needed break for investors and buyers who have been unable to refinance or proceed with their investment plans due to high serviceability calculations,” he said.
An end to uncertainty
Team Leader of the Buyer’s Agents at Momentum Wealth, Emma Everett, said these changes will help to restore further certainty for investors after Liberal’s election win confirmed negative gearing changes wouldn’t go ahead in January 2020.
“There’s been a lot of uncertainty amongst property investors over the past year surrounding taxation changes and the lending environment, but recent events should certainly help to restore confidence amongst buyers,” she said.
Mrs Everett warns that those looking to invest shouldn’t overlook other important factors influencing the performance of Australia’s individual property markets.
“Whilst APRA’s proposal, combined with the end to negative gearing uncertainty, provides welcome news for investors across Australia, they will also need to consider the additional factors influencing individual markets when deciding where to invest.”
“As we know, Australia’s property markets don’t all move in unison and tax and lending confidence is just one factor impacting a market’s performance, so investors will also need to think about issues such as affordability, supply factors and market sentiment in their property selection choice,” she said.