· APRA announces proposal to revise servicing regulations for residential mortgages
· Drop in assessment rates could see investors benefit from boost to borrowing capacity
· Proposed changes a further stimulus for improving WA market
The Australian Prudential Regulation Authority (APRA) has begun a four-week consultation to revise its guidance on serviceability metrics for residential mortgages – a move that couldn’t come at a better time for WA, according to property investment consultancy, Momentum Wealth.
The announcement is the latest in a line of wins for residential property investors, coming just days after the Liberal’s election success removed the possibility of a change to negative gearing in the short-term.
APRA’s proposal, outlined in a letter from Chairman Wayne Byres, included 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 also outlined 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 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 by lenders, 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 challenges in meeting tighter serviceability metrics.
“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 investors benefit from a significant boost to borrowing capacity, with the resulting increase in affordability giving them more flexibility.
“In one particular scenario, we’ve calculated that a drop in the servicing rate could see an investor’s maximum borrowing capacity rise from $378,000 to $448,000, which is an increase of roughly 19%, 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 who have been unable to refinance or proceed with their investment plans due to high serviceability calculations, and furthermore could see investors access higher-quality properties” he said.
Good timing for WA
With Liberal’s election win also confirming that changes to negative gearing won’t come into effect in January 2020, Team Leader of the Buyer’s Agents at Momentum Wealth, Emma Everett, says APRA’s announcement comes at a good time for WA’s property market.
“Combined with uncertainty surrounding changes to negative gearing, tight lending restrictions have presented a significant hindrance for investors in WA, so the recent announcements will certainly go a long way in restoring confidence and injecting more certainty into the market.”
“We have already seen significant improvements across the State’s rental market with vacancy rates dropping to their lowest level in almost six years and rental prices beginning to show signs of improvement, and with uncertainties surrounding potential taxation changes now gone, APRA’s proposal is a further stimulus in bringing buyers back into the WA market.”