THE Australian Prudential Regulation Authority’s (APRA) decision to relax its mortgage serviceability test has been welcomed by the property industry.
Under the previous regulations, lenders had to assess whether a borrower could afford repayments using a minimum interest rate of at least 7 per cent, or 2 per cent above the borrower’s rate, which ever was higher.
Common practice was to use a rate of 7.25 per cent.
“Previously, mortgage loans were only to those borrowers who could afford to service the mortgage repayments at a hypothetical APRA ‘floor’ interest regardless of how low actual market interest rates were,” Master Builders executive director John Gelavis said.
“Recent reductions in interest rates mean that this restriction is unnecessarily onerous and APRA’s announcement means that the interest rate floor has been scrapped.
“In future, borrowers will only need to have the capacity to absorb a 2.5 per cent increase in mortgage interest rates from current, all-time lows.”
Mr Gelavis said regulatory restrictions were one of the major factors which had contributed to the most significant downturn in WA’s new home building industry.
ABN Group managing director Dale Alcock said it was the “shot in the arm” the property market needed.
“This is fantastic news for the property market and welcome news for many Australians who currently cannot afford a home loan or who may be struggling to afford the home they want,” he said.
“The move will ultimately see more people able to get onto the property ladder faster and boost their buying power so they can purchase the home they really want.
“It will also provide much needed market stimulus and help restore confidence in the property market.”
Resolve Finance managing director Don Crellin called it one of the most significant developments in the property market for some time.
“These changes are a welcomed response to outdated borrowing criteria,” he said.
“While it made sense to introduce stricter borrowing rules during boom time to protect people from over extending, the current restrictions are unnecessarily high and simply do not suit today’s economic outlook or property market.
Other factors that might throw a lifeline to the struggling building and real estate industries include the broadening of Keystart eligibility and the cutting of official interest rates to 1 per cent earlier this month.