Just this week, the banks regulator (APRA) announced that Approved Deposit-taking Institutions (ADI’s), being the banks, credit unions and building societies, are to adopt a minimum 3% p.a. buffer rate when assessing a borrower’s capacity to service a loan. Non ADI’s have been spared from the new rule at this point in time.

A borrower must now prove their capacity to service a loan at a rate 3%pa above the actual rate. In some cases the assessment rate will be more than twice the actual rate. The new buffer rate is the highest it has been in recent history.

The assessment applies to all borrowings that the applicant has, not just the loan being applied for. This has clear implications for borrowers with high debt levels.

The strength of the housing market has been fuelled by a combination of low interest rates, economic activity generated by government grants, working-from-home arrangements, and solid job security.

The increase in debt being taken on by home borrowers is deemed by APRA as potentially high risk for the individual, the community, and the broader economy.

This increase in the serviceability buffer to 3.0%pa will clearly reduce the amount borrowers can raise. If the property market does not show signs of slowing within the next few months, the regulator is likely to take additional measures, such as a requirement for larger deposits and/or a reduced income to debt ratio, which will have a similar impact.

If you want to better understand what this means for your lending capacity and your portfolio, contact the team at Southshore Finance today.