Here’s how APRA caps could impact how much you could borrow

The Council of Financial Regulators today announced APRA will consider possible macroprudential policy responses to address the medium-term risk created as a result of surging loan sizes.

Ultra-low interest rates, strong demand for housing and soaring prices are stretching more borrowers into higher debt-to-income brackets.

While the regulator’s focus is on lending standards, changes under consideration are likely to help cool property prices.

Any new policy response must also ensure first home buyers are not unfairly impacted.

The discussion comes on the back of figures out this month showing 21.9 per cent of all new loans funded in the June quarter had a debt-to-income the ratio of six or more, which is considered risky by APRA.

This is up from 16 per cent of all new loans funded in the June 2020 quarter.

Potential changes	Details	Pros	Cons
Debt-to-income ratio caps	Limit the number of new loans with a debt-to-income ratio of 6 or more.	Help prevent people from taking on risky levels of debt. Could curtail investors buying multiple properties.	Could create a barrier for first home buyers unless exemptions are made.
Tightening of serviceability requirements	Mandate serviceability floor rates or increase buffers. Currently, banks stress test loans at rates 2.5% higher or their floor, whichever is higher. Big 4 bank average floor is 5.09%.	Will help protect people from mortgage stress when rates rise.	Could unfairly impact first home buyers.
Investor lending caps	Limit lenders to a set proportion of new loans to investors. From Dec 2014 – April 2018 APRA limited banks to 10% growth in investor loan books.	Reduces the number of investors competing with first home buyers and other owner-occupiers.	Investor loans are still proportionally at acceptable levels. The previous cap had limited success cooling property prices.
Low loan-to-value ratios caps	Limit the number of new loans with small deposits. Caps could vary according to borrower type (investors are likely to be required to have larger deposits).	Reduces risk in lending portfolios, particularly in the case of falling property prices.	Could unfairly target first home buyers unless exemptions are made. The proportion of low deposit loans fell in the most recent APRA data.
Interest-only caps	Cap the number of new loans that are interest-only. Between March 2017 and December 2018 banks were required to limit interest-only loans to 30% of new lending.	Encourages borrowers to pay down their debt, protecting them when rates do rise. Could deter investors.	Interest-only lending is currently well below the previous cap and therefore not required.
Combination of the above	APRA could implement a cap that looks at a combination of levers to reduce risk without penalising first home buyers.

RateCity.com.au research director, Sally Tindall, said intervention from APRA would be welcomed, however, any new macroprudential policy measures must be carefully considered.

“Record low rates mean people can borrow more without blowing the budget, but what is blowing out are loan sizes,” she said.

“Measures designed to curb people’s borrowing power will help prevent some from taking on risky levels of debt, however, first home buyers must be supported in the process.

“Any regulation changes must make provisions for younger Australians to still be able to enter the housing market,” she said.

Source: Here's how APRA caps could impact how much you could borrow (propertyupdate.com.au)