Could RBA changes to home lending policy affect you?
Over recent weeks there’s been talk of the Reserve Bank of Australia (RBA) introducing macroprudential measures as a way to slow down Australia’s rampant real estate market.
Traditionally, a good way to avoid a housing bubble (and any subsequent crash) is to raise interest rates. However, the RBA has kept the official cash rate (OCR) at an historic 10 year low over the past 14 months, at just 2.5 per cent.
They’ve done this to keep the broader economy in check and to maintain a holistic view of the Australian financial system. However, it means the RBA and banking regulator, the Australian Prudential Regulation Authority (APRA), need to look at other ways of specifically tackling the housing market.
One way is to enforce stricter rules on high risk lending. Known as macroprudential regulation, they could implement restrictions on certain bank loans, particularly home loans, in an effort to slow down the demand for credit and therefore demand in the property market.
But what do these rules and restrictions look like, and which ones are likely to be adopted?
LIKELY: The 'stress test'
- Banks assess a borrower's ability to repay a loan if the interest rate was to rise.
- Familiar territory for many lenders and mortgage brokers as some banks already do this test.
- It stops borrowers from getting in over their heads while interest rates are low.
LIKELY: Capital add-ons
- Banks must hold more capital against interest-only loans.
- Relies on banks charging higher interest rates to higher risk borrowers.
- No guarantee that banks can pass on the costs of this capital.
- Slow to implement and has a relatively small effect on true borrowing costs.
- Difficult to enforce as borrowers can still go to less regulated, non-bank lenders.
UNLIKELY: Loan to valuation caps
- Clients need to put down a minimum level of deposit before they can get a home loan.
- Central bank sets the minimum level of deposit.
- First home buyers likely to be hardest hit by such a cap as they generally have less deposit than investors.
- Already used in New Zealand, where banks aren’t allowed to issue more than 10 per cent of new residential loans to higher risk home buyers who have less than 20 per cent deposit.
And while we don’t have a clear indication of when, if any of these measures may happen, if your clients are concerned about the effect it could have on their borrowing capacity, ask them to contact me.
Now is still a great time to for first time buyers to fix an ultra low rate as lenders compete for market share, and homeowners can also benefit from a free review of their current loan structure to see if there’s a better package available for their needs.