Refinancers Caught Out By APRA’s Rule Changes
Some Australian home owners looking to refinance their mortgage to reduce debt have discovered they are “stuck” with their current loan due to stricter rules enforced by the Australian Prudential Regulation Authority (APRA) which is the government’s banking regulator.
One lender says tighter lending controls are penalising people with a good credit history on loans granted before the Australian Prudential Regulation Authority (APRA) tightened their rules leaving them unable to take advantage of better offers.
APPRA’s rules which were toughened in March 2017 are aimed at improving banks’ balance sheets in order to allow them to withstand future financial shocks similar to the Global Financial Crisis 10 years ago.
The tighter rules include limiting new interest only loans to only 30 per cent of the market, at Loan to Value Ratios (LVRs) below 80%. At the same time, borrowers are being assessed on higher interest rates and higher deemed expenses. This will ensure borrowers have a much bigger buffer to service their loans should rates go up. Dramatically!
For refinancers, assumed expenses have increased markedly. Additionally, 20 per cent of the principal needs to have been paid before being eligible to secure a new loan from most lenders at present.
The new rule changes have had “unintended consequences” for some, AMP chief economist Shane Oliver said.
“It is well known that [APRA’s macro prudential controls] can have unintended consequences, which they regrettably aren’t necessarily aware of”, Dr Oliver said.
Dr Oliver went on to say, “An issue of that is borrowers coming in on the old lending standards and finding themselves unable to refinance. It’s probably a relatively small part of the market and the positive impact of tightening lending standards probably outweighs problems with that sector at the moment”.
In response to the new APRA rules, lenders are now using new higher minimum weekly living expenses assumed for applicants as well as assessing applications on rates of 7.25-8.00% interest – double the current rates. This has the effect of reducing the loan amounts borrowers can be approved for.
The new standards are essentially APRA forcing Lenders to reduce the amount of money they are able to lend to new borrowers / refinancers. Additionally, refinancers will need to have paid off more of their principle (to get under the 80% LVR rules) before they can access new lower interest rate products on offer.
Lenders’ risk appetite has changed because of APRA’s guidelines as well as ASIC’s responsible lending guidelines.
As a result, Brokers are meeting refinancers that don’t understand why they don’t pass serviceability tests any more, when their circumstances are unchanged from when they were granted their loans a year ago.
Essentially, these refinancers are disadvantaged customers.
APRA chairman Wayne Byres has said the authorities’ rules are making positive impacts on the market. This is especially true in the investor space.
“We’ve seen serviceability assessments strengthen, investor loan growth slow and high-LVR lending reduce. New interest-only lending has also fallen, and appears on track to fall below our benchmark later this year”, Mr. Byres said.
