APRA proposes changes to lending standards, what could this mean?

Anyone who has attempted to borrow money recently will know that the process has increased in complexity & your 'capacity', the amount you can borrow has significantly reduced.

In ways this is good - and in others - well, perhaps unnecessarily harsh.

The regulators introduced hard and fast standards for lenders which gave a minimum assessment rate - you had to be assessed assuming an interest rate (floor rate) well above the actual rate - and using actual living expenses as explored and detailed by lenders, and with the looming shadow of what we call "HEMS", a standard that is based on average expenses for someone on your income in your suburb. So your actual living expenses have to be explored in detail - and at least come up to HEMS - or regulators start frowning.

As always happens when rules are arbitrarily applied there are unintended consequences, for example:

  • Someone in a loan on a high interest rate with perfect repayment history, can't refinance because they no longer meet the affordability criteria, even though they are not in any hardship and have never missed a beat.

  • Someone who consciously saves and spends well under the arbitrary HEMS, yet lives perhaps in a suburb where the 'average' is high - they will have an artificially increased living expense applied to them.

  • Someone who spends all of their cash because they can - and has had that light bulb moment and wants to put it into a more wise investment. This last case to a degree is actually many more of us than we realise. And the question I ask is, would you continue to eat out regularly if your house was at risk? Unlikely.

While it's not the goal to stretch borrowers to their maximum, in cases it has been limiting to the point of preventing something positive.

APRA potentially relaxing restrictions to the floor rate - depending on how and when banks apply it - and in combination with some of the lowest fixed rates I have ever seen could spell an increase in borrowers capacity, which could help many stuck in expensive loans and unable to get out of them, or wishing to step up in the property market. Of course, there will still be a prudent buffer in place, and of course, we still need to discuss the repayments in relation to your budget but this is the first inkling that the recent regulatory changes went a little too far, and spells positive news for many borrowers and the property market alike.


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