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New home loan stress test – how much less Australians will be able to borrow

New home loan stress test – how much less Australians will be able to borrow

The maximum amount Australians can borrow from the bank to buy a property is set to drop, as APRA tightens lending rules.

APRA has written to the banks and told them to increase the rate at which they stress test mortgages from 2.5 per cent to 3 per cent by the end of October. This action is in response to soaring property prices and ballooning loan sizes. Latest data from APRA shows 21.9 per cent of new loans have a debt-to-income ratio of 6 or more, which is considered risky.

From November, banks need to check if people can repay their loan at 3 per cent more than their current interest rate, or the ‘floor’ rate set by the bank – whichever is higher.

Base variable rateOld stress test rateNew stress test rate
CBA

2.69%

5.25%

5.69%

Westpac

2.49%

5.05%

5.49%

NAB

2.69%

5.19%

5.69%

ANZ

2.72%

5.22%

5.72%

Average

2.65%

5.15%

5.65%

Note: CBA and Westpac’s floor rates were used in the old stress test as they were higher than the previous 2.5% buffer.

The new 3 per cent buffer rate does not apply to non-bank lenders. However, APRA is considering including them later this year.

How much less will Australians be able to borrow with APRA changes?

APRA estimates a household’s maximum borrowing capacity will drop by 5 per cent. Therefore, a household, who under the old rules could borrow a maximum of $500,000 will see their borrowing capacity fall to $475,000 - a drop of $25,000.

However, many households do not borrow to their full capacity and so may not be impacted by these changes.

Current borrowing capacity5% less borrowing capacityDifference

$500,000

$475,000

$25,000

$600,000

$570,000

$30,000

$750,000

$712,500

$37,500

$1,000,000

$950,000

$50,000

Source: RateCity.com.au

How Australians on average income will be impacted by APRA changes

RateCity research has estimated that the average family’s maximum borrowing capacity could drop by $35,025 under the new serviceability buffer rules.

This assumes one adult is working full time and the other part time (1.5 times full time average wage) with two dependent children, based on CBA’s serviceability calculator on a fixed rate.

A single person on the average income will be able to borrow approximately $28,515 less under the new rules.

Borrower typeAnnual wageOld Borrowing capacity New borrowing capacity Difference
Single, no dependants

$90,329

$570,300

$541,785

$28,515

Family of 4

$135,494

$700,500

$665,475

$35,025

Notes: Calculations are based on CBA’s serviceability calculator for a borrower taking out a CBA fixed rate. Income is based on the ABS average weekly wage, full time adult ordinary time earnings, a family is considered to have 1.5 full time incomes. HEM is estimated to be $4,500 per month for a family and $2,000 per month for a single person. Assumes no other existing debts.

RateCity research director, Sally Tindall, said: “These new changes will clip the wings of people borrowing at their capacity”

“Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want,” she said.

“The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first home buyers who typically have smaller incomes and deposits.

“While property prices are influenced by a range of factors, how much people can borrow is a major one.

“In July 2019 when APRA scrapped the minimum floor rate alongside a series of cash rate cuts, many Australians saw their borrowing capacity rise overnight and the property market followed.

“Today's hike to the serviceability buffer is also likely to have an impact on the property market.

“Many households don't borrow at capacity, but anyone who was planning to will have to reassess their budget and potentially their home-buying plans.

“This change will be a hard pill for some borrowers to swallow, however, it will ultimately protect them from overstretching themselves and that's a good thing,” she said.

How banks calculate the 3% buffer

  • Fixed rates

Banks use revert rates on fixed rate loans to measure serviceability. This means the 3 per cent buffer will be added to the revert rate when calculating how much someone can borrow.

For example, the revert rate on CBA’s 1.99 per cent two-year fixed for owner-occupiers paying principal and interest is 3.85 per cent, so the serviceability check would be at a rate of 6.85%.

  • Variable Rates

For variable home loans, the 3 per cent buffer is added to the rate a customer is offered. For example, on CBA’s current lowest variable rate of 2.69 per cent, the mortgage stress test will be done at a rate of 5.69 per cent.

If the bank’s floor rate is higher than the buffer, it will be applied.

Current big four bank serviceability floor rates

CBA

5.25%

Westpac

5.05%

NAB

4.95%

ANZ

5.10%

First home buyer? Calculate how much a 3% buffer may impact your repayments

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This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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