Australia’s thriving property market has recovered so swiftly since the brief pandemic-induced recession of 2020, that authorities have stepped in to pull the reigns on runaway real estate prices. As a result, lenders have been asked to tighten serviceability criteria.

Nationally, dwelling values are up 20.3% higher over the past 12 months, every capital city experiencing significant growth across the board. Melbourne, despite ongoing lockdowns dampening the market, still increased by 15%.

That’s where the Australian Prudential Regulation Authority (or APRA) comes in. On October 6, it wrote to lenders announcing an increase to the minimum interest rate ‘buffer’ it requires them to use when assessing the serviceability of home loan applications. APRA told lenders that from November 1, they must assess new borrowers’ ability to meet loan repayments at an interest rate at least 3 percentage points above the loan product rate – a 0.5 per cent increase to the previous 2.5 per cent buffer.

Why did APRA do it?

The early October announcement by APRA was a “targeted and judicious action” designed to reinforce the stability of the financial system according to chairman Wayne Byres. “In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” he wrote in a letter to lenders.

More than one in five new loans approved in the June quarter were in excess of six times the borrowers’ income and APRA’s fear has clearly been that housing credit growth will run ahead of household income growth. “With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.

What difference will it make to you?

Overall, such a small tweak will probably not make a huge difference to average borrowers who may not have been borrowing at their full capacity anyway. However, for those who are stretching their borrowing budgets to almost the last dollar, such as first-home buyers struggling to meet rising prices, this move could be significant.

Ultimately, APRA has stated that the change will cut the maximum amount available to a typical borrower by approximately 5 per cent.

• • Borrowers who were previously approved for a $500,000 loan would now be able to borrow $475,000
  • Anyone with the green light to take out a $1 million mortgage would now be looking at $950,000

The impact this will have on prices or the current sky-high demand throughout most markets is yet to be determined as anyone who obtained a three-month pre-approval towards the very end of October would be under the previous 2.5 per cent serviceability buffer well into the new year. These changes will affect investors and owner occupiers in differing ways.

The changes are likely to have more of an impact on the investment segment of the market, as investor rates are higher than owner occupier mortgage rates. APRA also highlighted in their announcement that investors tend to borrow at higher levels of leverage and often have other existing debts, which would also be subject to the increased serviceability assessment.

What other changes are on the horizon?

Although APRA’s recent announcement will unlikely make a huge impact on demand for credit or even push down prices, it may well be a sign of future changes. While the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the level of housing credit and household debt are monitored, the high debt-to-income ratios being a focus.

To find out how the tightened lending criteria will impact your borrowing power, get in touch with us today.

Building your own home is a dream for many of us. And with the current low interest rates and government incentives available, it’s great that more and more of us are doing it.ⁱ Here’s what you need to know about financing your own dream build with a construction loan.

A construction loan finances the building of a new home or the renovation of an existing one. It works by releasing funds to pay for each completed stage of the build – often on interest only repayments. Say your build costs $500,000. When the first stage is done, you draw down $90,000 to pay for the completed work. The good news is that you’re minimising your monthly repayments during the build and once the build is finished, your loan changes to a regular property loan.

The loan process

Construction loans are more complex than regular home loans, and unfortunately, so is the paperwork. We can help you collect all the information you need to get your loan up and running. Your licensed builder or architect will also know exactly what’s needed for each drawdown stage.

Applying for conditional pre-approval is very important as it lets you know how much your total spend can be. This influences the builder, design and materials you choose.

As with any loan, the amount you can borrow depends on many factors. In general, construction loans allow you to borrow up to 95% Loan to Value Ratio (LVR) and have variable interest rates. The lender takes into account your income, living expenses, existing equity, as well as the interest rate. We also need to submit your building plans, detailed budget and schedule, and your builder’s license for checking.

The lender uses a specialist assessor to work out the value of the finished property and if the budget is realistic. This determines the size of the loan you’re offered.

You may also need to submit the following documents before the agreed loan can be activated:

• • A copy of the signed, industry-standard fixed-price building contract and agreed progress payment schedule.

• • A copy of the final architectural plans, specifications and any permits needed.

• • A receipt for any deposit paid to the builder or suppliers.

• • The builder’s bank account details for direct credit of progress payments.

• Insurance including Builder’s All Risk, Domestic/Home Warranty and Public Liability.

You may need to amend the plans, budget or contract details between yourself, your lender and your builder. We can take the pressure off you by helping with some of these negotiations as well as organising the actual loan.

The building process

Progress payments are sent to the builder as each stage is completed and signed off by the lender. This involves an inspection and re-valuation of the project. There are usually five sign-off stages for a new build:

1. 1. Slab down – This covers preparing the ground, plumbing and waterproofing.
   2. Frame up – This is for the framing, including trusses, windows, roofing and some brickwork.
   3. Lockup – This is when the building is lockable. It generally includes brickwork and insulation, external doors, walls and windows.
   4. Fit out – This covers inside installation of plumbing, electrics, fittings and fixtures.
   5. Completion – This involves finishing the walls and ceilings, painting, fitting electrical appliances and the final clean. Depending on your project, sign-off stages for a renovation may differ from these.

If at any stage your building costs go over budget or time, we can negotiate with the lender. They might agree to increase your loan, but you need to apply before doing the work.

Whether it’s a new home, a renovation or investment property you want to build, as your mortgage broker, we can help smooth the process by making sure you have all the documentation the lender needs.

So please feel free to call or come in for a chat about your dream build project, as well as any government grants that may be available to you.

i https://www.abs.gov.au/statistics/economy/finance/lending-indicators/aug-2021

For those of us who’ve been in and out of lockdown over the past 20 months, this has meant a significant shift in the way we shop, not only physically, but the way we pay for our goods has changed too.

For many years now EFTPOS, cash, and credit cards have been the most common ways to purchase items. However, over the past five years we’ve seen alternate payment services like Buy Now Pay Later (BNPL) emerge. They’re becoming increasingly popular, so much so, that the total amount of credit extended under buy now pay later arrangements has almost doubled from the 2017–18 financial year to the 2018–19 financial year.ⁱ

What is BNPL?

Buy now pay later services allow you to purchase items and take them home immediately – if purchased in-store – and pay them off in instalments (usually four fortnightly payments). It’s important to recognise that this service is still a credit facility; however, you won’t have to go through the same credit checks as you would if you were applying for a credit card.

BNPL services do not charge interest but if you do not meet the required repayments, you might incur a fee and this could have an impact on your credit rating which may then be an issue if you apply for a loan in the future.

Keep track of your spending

Around this time of year, we’re usually counting down the days until we can take a break from work and we look forward to spending more time with family and friends.

During this time, our spending tends to increase too, and the repercussions can end up lasting longer than the holiday period.

Buying gifts for family and friends can be expensive, even if you’re spreading out your payments by using BNPL services, and so can social occasions like celebrating the end of the year with work colleagues or family and friends.

Try to plan early and set yourself a budget, working out how much you can afford to spend will help to ensure you don’t end up with a financial hangover in the new year.

Create a budget

A good place to start is to work out which family and friends you’d like to buy a gift for then set a limit for each. If you’re unable to buy a gift for everyone, why not suggest a Kris Kringle; that way you can purchase one gift and perhaps spend a little more than you normally would if you buy an individual gift for each member of the family.

Do the same with social activities. Try and plan as many outings as possible and set yourself a spending limit for each. There are always going to be occasions where you’re unable to plan ahead so creating a buffer within your budget allowance could help pay for those unexpected activities. It could also help if you do overspend on gifts.

Plan ahead and don’t blow the budget

Manage your time effectively. Our time is such a precious commodity, we never feel like we have enough. As we approach the holiday season, try to plan in advance as much as you can. The moments we feel rushed are when our spending levels tend to increase. For example, last minute gifts, higher priced tickets and more expensive shipping so our delivery arrives in time. You’ll also have the added bonus of eliminating the some of the holiday stress, with more time to relax and enjoy with friends and family.

Having fun this holiday season will be a priority for most of us this year, especially if this is going to be the first time you’ve seen loved ones in quite some time but making sure you don’t go overboard with your spending should be an important factor too.

i ASIC.gov.au – November 2020