I write this email with brittle fingers, for I have typed my fair share of words over these past couple of months. The words I speak of, are made up of emails responding to clients and notes back and forth to lenders on an increased amount of applications (OK and the occasional fan mail to my wife).
I’m not complaining though, as this (increase) is what many people were hoping for, that our regulators would chillax and loosen an overzealous lending restriction. The restriction I mention is the “buffer rates” lenders have been forced to use when assessing a home loan, until now.
Side note: Did you know that in 2016 the Victorian Government estimated that in 2031 Victoria’s population would be at 7.7 million? However, last month they upped that to 8.1 million… That’s 400,000 more people or 200,000 more homes needed in Vic. Big news indeed
In summary, what happened is that for the past few years APRA (regulators) acted to cool down our lending to investors and interest only lending. They had their eyes set on making sure that our property markets didn’t get ahead of themselves and to enforce a more prudent approach to lending (by eliminating more risky lending).
They did this by enforcing a minimum interest rate floor of 7% for assessing your home loan application (to see if you could afford it when rate eventually went up again).
Of course, as actual interest rates went from the mid 5% range to sub 4% these restrictions still remained in place, so what was once a circa 2.25% buffer had now become a 3.5% buffer with some lenders.
Why should I care? What does all this even mean for me?
Well…. Over the last few years it has meant that your borrowing power was LOWER on ALL types of lending, not just investment lending.
However, with the sharp decline in capital city house prices (due to less investors able to borrow) and lowering of interest rates over the past 2 years APRA has now decided maybe they were a bit harsh and have removed the above buffers.
Let’s be clear though, this is not absolving the lenders’ (and your broker) of their responsibility to lend prudently and applications are still as tricky to get approved BUT the removing of the buffer (speed limit) has meant that the banks have come up with their own floor rates now of circa 5.5% (some are even less).
So, what’s the difference between the 5.5% and the 7.25% in your borrowing power we (and Alexa) hear you say?
Well, it could be a lot.
As an example, a married couple whom I looked at affordability for last month can now borrow 15% more. 15% more.
Investor clients on interest only payments are better off too, albeit not by as much as the person buying their own home.
Today I want you to think about these three very important points:
- The RBA lowered the cash rate to 1% recently, which means interest rates of low 3s are easily achievable…There are offers on QANTAS points, cashbacks and ridiculously low interest rates at the moment. This means lower monthly repayments (or you could pay your current loan off years earlier – ask me how)
- The lowering of the above-mentioned buffer rates means that you can likely borrow more
- BUT, so can everybody else…
Have you been thinking about getting into the market but have been sitting on the fence, waiting for a price drop? You might be waiting a little while…
The government, the RBA and the public all prayed for rain, yet when the proverbial heavens opened we found ourselves unprepared for the flood (and our dinosaurs drowned). Maybe they fell off our flat earth? (For the record, I’m not one of those flat Earth folks, so please don’t unsubscribe just yet).
Of course, it could all turn pear-shaped and the spike in enquiry could be short-lived but with record low interest rates, improved borrowing power, the First Home Loan Deposit scheme coming in a few months, hundreds of thousands of skilled workers entering our country each year (to pay for our aging population) and a flood of new buyers into the market as a result, it is quite likely you might miss your boat if you take too long.
So, take a look at your household budget. Regardless of what a bank says, how much can you afford to repay?
Then speak to a guru broker but most importantly if you’ve been thinking about getting into the market get off the fence and onto the ark. Don’t be a dinosaur, get on board because…
Good or bad the rains are certainly coming
If you want a review of your lending or just a general no-obligation chat about your property ambitions please get in touch with Lee today.
What have you got to lose apart from thousands of dollars in interest payments or potentially years off a mortgage?