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New home loan stress test – how much less Australians will be able to borrow

The maximum amount Australians can borrow from the bank to buy a property is set to drop, as APRA tightens lending rules.

APRA has written to the banks and told them to increase the rate at which they stress test mortgages from 2.5 per cent to 3 per cent by the end of October. This action is in response to soaring property prices and ballooning loan sizes. Latest data from APRA shows 21.9 per cent of new loans have a debt-to-income ratio of 6 or more, which is considered risky.

From November, banks need to check if people can repay their loan at 3 per cent more than their current interest rate, or the ‘floor’ rate set by the bank – whichever is higher.

Base variable rateOld stress test rateNew stress test rate
CBA

2.69%

5.25%

5.69%

Westpac

2.49%

5.05%

5.49%

NAB

2.69%

5.19%

5.69%

ANZ

2.72%

5.22%

5.72%

Average

2.65%

5.15%

5.65%

Note: CBA and Westpac’s floor rates were used in the old stress test as they were higher than the previous 2.5% buffer.

The new 3 per cent buffer rate does not apply to non-bank lenders. However, APRA is considering including them later this year.

How much less will Australians be able to borrow with APRA changes?

APRA estimates a household’s maximum borrowing capacity will drop by 5 per cent. Therefore, a household, who under the old rules could borrow a maximum of $500,000 will see their borrowing capacity fall to $475,000 - a drop of $25,000.

However, many households do not borrow to their full capacity and so may not be impacted by these changes.

Current borrowing capacity5% less borrowing capacityDifference

$500,000

$475,000

$25,000

$600,000

$570,000

$30,000

$750,000

$712,500

$37,500

$1,000,000

$950,000

$50,000

Source: RateCity.com.au

How Australians on average income will be impacted by APRA changes

RateCity research has estimated that the average family’s maximum borrowing capacity could drop by $35,025 under the new serviceability buffer rules.

This assumes one adult is working full time and the other part time (1.5 times full time average wage) with two dependent children, based on CBA’s serviceability calculator on a fixed rate.

A single person on the average income will be able to borrow approximately $28,515 less under the new rules.

Borrower typeAnnual wageOld Borrowing capacity New borrowing capacity Difference
Single, no dependants

$90,329

$570,300

$541,785

$28,515

Family of 4

$135,494

$700,500

$665,475

$35,025

Notes: Calculations are based on CBA’s serviceability calculator for a borrower taking out a CBA fixed rate. Income is based on the ABS average weekly wage, full time adult ordinary time earnings, a family is considered to have 1.5 full time incomes. HEM is estimated to be $4,500 per month for a family and $2,000 per month for a single person. Assumes no other existing debts.

RateCity research director, Sally Tindall, said: “These new changes will clip the wings of people borrowing at their capacity”

“Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want,” she said.

“The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first home buyers who typically have smaller incomes and deposits.

“While property prices are influenced by a range of factors, how much people can borrow is a major one.

“In July 2019 when APRA scrapped the minimum floor rate alongside a series of cash rate cuts, many Australians saw their borrowing capacity rise overnight and the property market followed.

“Today's hike to the serviceability buffer is also likely to have an impact on the property market.

“Many households don't borrow at capacity, but anyone who was planning to will have to reassess their budget and potentially their home-buying plans.

“This change will be a hard pill for some borrowers to swallow, however, it will ultimately protect them from overstretching themselves and that's a good thing,” she said.

How banks calculate the 3% buffer

  • Fixed rates

Banks use revert rates on fixed rate loans to measure serviceability. This means the 3 per cent buffer will be added to the revert rate when calculating how much someone can borrow.

For example, the revert rate on CBA’s 1.99 per cent two-year fixed for owner-occupiers paying principal and interest is 3.85 per cent, so the serviceability check would be at a rate of 6.85%.

  • Variable Rates

For variable home loans, the 3 per cent buffer is added to the rate a customer is offered. For example, on CBA’s current lowest variable rate of 2.69 per cent, the mortgage stress test will be done at a rate of 5.69 per cent.

If the bank’s floor rate is higher than the buffer, it will be applied.

Current big four bank serviceability floor rates

CBA

5.25%

Westpac

5.05%

NAB

4.95%

ANZ

5.10%

First home buyer? Calculate how much a 3% buffer may impact your repayments

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This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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 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.

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 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.

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.

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.

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.

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.

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. 

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.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.