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How APRA caps could impact how much Australians can borrow

How APRA caps could impact how much Australians can borrow

Consumer advocate RateCity.com.au welcomes news APRA is considering changes to address the increasing risk in Australia’s home lending market.

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.

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 of 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.

New loans with a debt-to-income ratio of 6 or more

June quarter 2020June quarter 2021
16.0% of all new loans21.9% of all new loans

Source: APRA quarterly authorised deposit-taking institution statistics, all ADI’s, released Sept 2021.

What APRA lending caps could potentially include:

Potential changesDetailsProsCons
Debt-to-income ratio capsLimit 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 requirementsMandate 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 capsLimit 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. Previous cap had limited success cooling property prices.
Low loan-to-value ratios capsLimit the number of new loans with small deposits. Caps could vary according to borrower type (investors 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. Proportion of low deposit loans fell in the most recent APRA data.
Interest-only capsCap 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 previous cap and therefore not required.
Combination of the aboveAPRA could implement a cap which 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.

What a cap on debt-to-income would look like

A ban or cap on new lending with a debt-to-income ratio of 6 or more would limit the amount many families could borrow to purchase a property.

Family buying a house: maximum borrowing capacity of average family if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit people’s buying capacity.

Annual family income

(1.5 full-time wages)

Borrowing capacity with debt-to-income ratio under 6Median house priceBorrowing capacity required (20% deposit)Borrowing capacity required (10% deposit)
Sydney

$137,615

$824,316

$1,293,450

$1,034,760

$1,164,105

Melbourne

$136,555

$817,962

$954,496

$763,597

$859,046

Brisbane

$128,443

$769,371

$691,214

$552,971

$622,093

Adelaide

$122,452

$733,489

$568,110

$454,488

$511,299

Perth

$146,617

$878,233

$556,509

$445,207

$500,858

Hobart

$118,615

$710,501

$684,737

$547,790

$616,263

Darwin

$132,226

$792,031

$572,102

$457,682

$514,892

Canberra

$148,871

$891,736

$933,960

$747,168

$840,564

Notes: Family income is estimated at 1.5 times the average ordinary time earnings per state in original terms (ABS). Median house prices are from Core Logic August 2021 except Perth which is July 2021. Debt-to-income ratio of 5.99 is assumed. LMI costs not included.

Singles buying a unit: maximum borrowing capacity of an average worker if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit buying capacity.

Annual wage Borrowing capacity with debt-to-income ratio under 6Median unit priceBorrowing capacity required (20% deposit)Borrowing capacity required (10% deposit)
Sydney

$91,744

$549,544

$825,514

$660,411

$742,963

Melbourne

$91,036

$545,308

$615,909

$492,727

$554,318

Brisbane

$85,628

$512,914

$425,777

$340,622

$383,199

Adelaide

$81,635

$488,992

$364,575

$291,660

$328,118

Perth

$97,744

$585,489

$404,257

$323,406

$363,831

Hobart

$79,076

$473,668

$523,856

$419,085

$471,470

Darwin

$88,150

$528,021

$349,698

$279,758

$314,728

Canberra

$99,247

$594,491

$525,971

$420,777

$473,374

Notes: Average wage is from the ABS Average Weekly Earnings, ordinary time earnings per state in original terms. Median unit prices are from Core Logic August 2021 except Perth which is July 2021. Debt-to-income ratio of 5.99 is assumed. LMI costs not included.

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This article was reviewed by Janet Lee before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

What are the benefits of a reverse mortgage from P&B Bank?

A reverse mortgage allows senior homeowners to unlock the equity in their homes. There is no repayment schedule, and the loan is repaid at the time of selling, if you move out or when the homeowner passes away. The interest accumulates on the outstanding amount and is added to what was initially borrowed.

Here are some benefits of applying for a P&B Bank reverse mortgage:

  • Flexibility to use the funds as desired; you can travel, pay for medical bills or undertake home improvements or use it for your regular living costs
  • A negative equity guarantee ensures the amount you have to repay never exceeds the value of your home
  • A reverse mortgage does not have a regular monthly instalment, and you can repay any amount you wish at any point during the loan tenure
  • You can choose to withdraw the loan amount as per your requirements

The P&B Bank reverse mortgage amount is based on factors like your age, location of the property, and the loan-to-value ratio (LVR).

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

What is the ME bank home loan approval time?

To start the process of getting a loan with ME bank, you can fill out the online application form. You’ll have to provide information about your income details, assets and liabilities, and the property you want to buy.

Generally, the pre-approval of your loan application can happen within four hours, and in some instances, it may take up to two weeks. It’s important to remember this is only conditional approval.

If you make an offer and the seller accepts it, you’ll need to wait for the cooling-off period, which varies from two to five days depending on where you live. After that, it can take between six and eight weeks after contracts have been exchanged for your application for unconditional approval to be processed.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.