Home buyers are set to receive a borrowing boost in the order of $100,000 because of a combination of looming changes to lending standards and interest rate cuts, new modelling shows.
A single borrower with an annual income of $80,000, no other debts and average – or below – living expenses could today expect to be approved for a maximum loan amount of $512,000.
This would increase to $567,000 under the proposed relaxation of loan serviceability rules flagged by the banking regulator last week, according to modelling by Independent Mortgage Planners.
It would increase again, to $598,000, if the Reserve Bank also delivers anticipated interest rate cuts of half a percentage point in coming months, by enabling borrowers to service higher debts off a given income.
Combined with the defeat of Labor’s negative gearing reforms and the Morrison government’s new scheme to help first-time buyers, analysts have begun tipping an end to property price falls across Sydney and Melbourne.
“Combined, we think these events will lift sentiment – especially in the housing market,” ANZ economists David Plank and Felicity Emmett, wrote in a note to clients on Friday.
Since 2014, lenders have been required by the Australian Prudential Regulation Authority to make sure potential borrowers can service their loan sizes at an interest rate of 7 per cent, with most lenders using a slightly higher test of 7.25 per cent.
The regulator now proposes borrowers be tested for their capacity to meet repayments at the prevailing mortgage rate – currently around 3.75 per cent – plus a buffer of 2.5 per cent.
That would result in an immediate relaxation in the serviceability test of 1 percentage point, from 7.25 per cent to 6.25 per cent. If the Reserve Bank also lowered interest rates by another half a percentage point, that would fall to 5.75 per cent – a full 1.5 percentage point below the current test.
Craig Morgan, the managing director of Independent Mortgage Planners, said the combination of rate cuts and rule changes could provide a significant boost to maximum borrowing limits.
But it remained to be seen how banks would respond, Mr Morgan said. “The calculations assume – and it’s a huge assumption – that lenders choose to relax their standards to the maximum permissible. Some may, but I believe most will be more conservative, at least until we see definite and widespread signs of a housing recovery.”
If banks did relax standards to the permissible maximum, however, a dual income couple with no kids, both on incomes of $80,000, could expect to borrow about $150,000 more – boosting their potential loan size over the $1 million mark. The same couple, but with two kids in tow, could borrow $122,000 more, for a total loan size of about $841,000.
But, contrary to popular perception, the Morrison government’s new scheme to help a limited number of first-time buyers avoid paying lenders mortgage insurance would do little to improve those borrowers’ ability to service bigger loans, Mr Morgan said.
“I don’t see the scheme having any significant effect on borrowing capacity or access to finance. Largely, I see it doing little more than allowing a fortunate few to avoid insurance costs – which is, of course, nothing to be sneezed at.”
First-home buyer Jan Zhou is saving for an off-the-plan apartment in Sydney Olympic Park. She, too, is wary.
“[The scheme] sounds really great, but it might not be that helpful,” said Ms Zhou, who put a 5 per cent deposit on a one-bedroom unit in Mirvac’s Pavilions development in 2017 and has plans to save a 20 per cent deposit by settlement date to avoid getting lenders mortgage insurance with her loan.
“I would like to borrow more, but with current interest rates, if I borrow 90 per cent, I can’t really afford repayments. People who might be less cautious [may find themselves] later struggling.”
Capital Economics’ Ben Udy said many borrowers may choose not to borrow to the new limits. “The Reserve Bank estimates that less than 20 per cent of borrowers take loans close to their borrowing limit,” Mr Udy said.
However, combined with interest rate cuts, it was likely maximum loan sizes would rise in coming months.
“The upshot is that house price declines should continue to moderate,” he said.
SMH/ MAY 26 2019