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How APRA’s new serviceability buffer will affect property investors

Oct 26, 2021 |ALISON CHEUNG

Increasing the serviceability buffer from 2.5% to 3% could see the maximum borrowing capacity of property investors fall by up to 16%, triple the 5% expected by APRA.

We crunched the numbers with servicing calculator platform, Quickli, to compare how new mortgage stress tests could affect property investors in three different scenarios.

• A household who owns their own home and two investment properties could see their borrowing capacity reduced by $92,505 or about 16%.

• The maximum amount a household owning their own home and one investment property can borrow could fall by $84,869, or 11.8%.

• For an average ‘rentvestor’ family who owns one investment property, their maximum borrowing capacity could fall by $70,473, or 8%.

The new lending rules explained in simple terms

One of the biggest lending rule changes announced by APRA since 2015, an increase to the serviceability buffer will make it tougher for many borrowers to get a new mortgage, or refinance, from the end of October 2021.

The increase means the bank will assess whether you can still afford the repayments if the interest rate rose by 3%.

For example, if you applied for a home loan with a 2% rate, your bank would assess whether you can afford repayments if the rate was at least 5%. If your bank believes you couldn’t service the loan on this rate, they will decline your application.

In other words, the maximum amount you can borrow from a lender will drop.

As Futurerent isn’t a home loan lender, we don’t assess our clients’ serviceability in the same way and aren’t affected by APRA’s new rules. Given Futurerent is simply providing property investors access to their rent upfront and only looks at your rental income, APRA rules won’t affect how much you can access with us.

How much could your borrowing power fall?

The full results of our analysis, which was done with a real servicing calculator, highlights the true impact of APRA's tougher mortgage rules:

  • The difference 0.5% can make – Based on the above scenarios, increasing the buffer from 2.5% to 3% means a household’s borrowing capacity will be reduced by almost $100,000 (-16.32%).
  • What if there was no buffer? – Hypothetically, if the family in scenario 2 were being assessed purely on the actual 3.3% interest rate they were paying, their borrowing capacity would be $687,293 (49%) higher than if they were being assessed with a 3% buffer applied. In scenario 3, they could afford $747,185 (61%) more.

How will tougher mortgage rules impact property investors?

Serviceability assessments were already painful for property investors without these new lending restrictions.

The RBA has acknowledged that the increased buffer is going to hurt investors more than owner-occupiers.

“The effect on borrowers with existing mortgage debts (such as investors) would be larger, as the increase in the serviceability assessment rate also applies to a borrower's existing debts,” the central bank said.

APRA expects the higher buffer will reduce a “typical” borrower’s maximum borrowing capacity by 5%. That might be the case if you have no other mortgage debt – which excludes property investors, as shown in the calculations above.

This means the actual reduction will be much bigger than 5% for property investors. In very general terms, a bump in the serviceability buffer from 2.5% to 3% represents a 16% decrease in borrowing capacity for most property investors.

APRA reckons the impact from this will be “fairly modest”. Interestingly, the RBA doesn’t necessarily think that’ll be the case for everyone.

“For other more constrained borrowers, including some who would have taken out their maximum loan even before the adjustment to the serviceability buffer, the reduction in the amount they can borrow will cause them to choose not to borrow at all at this time, say by delaying a property purchase,” the RBA said.

How will the new serviceability buffer impact the broader market?

This has major implications and not just for property investors looking to buy an additional property, it will also impact a lot of households’ abilities to refinance and might end up costing a lot of people a lot more money.

Say for example you’ve borrowed $500,000 at a 3.5% interest rate and you're comfortably meeting the repayments, but you decide you’d like an extra $50,000 and see another bank advertising a 3% interest rate. To refinance, the bank will need to work out if you can afford $550,000 at a 6% interest rate. If they can’t demonstrate that you can service at a 6% rate, you won’t qualify for the loan. This prevents you from accessing the $50,000 and from accessing a cheaper rate.

In the last year, property prices in Sydney have risen by 23.6%, or $1,238 per day in the September quarter. This means delaying purchases is costing real money – being forced to put your plans on ice because interest rates ‘might’ rise over the long term can have a real and substantial impact.

As an example, for rentvestors who have been saving for their family home, the new buffer might mean going back to the drawing board and waiting years to build up more equity. There’s also the risk of being priced out of the market during this time.

Importantly, APRA says it “does not rule out that the other measures might be used in the future”.

At Futurerent, we understand that timing is everything and there are real costs to delaying your plans. Unfortunately, by changing the goal posts again, the banks are knocking back responsible borrowers for loans they can actually afford and, in many cases, this is actually costing borrowers real money.

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ALISON CHEUNG

Alison has written about property since 2015. Her work has been published by NewsCorp, Domain and Business Insider. Alison is motivated to help Australians make better property investment decisions.

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