The Australian Prudential Regulation Authority (APRA) is a statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry.
Recently, APRA have imposed new measures on lenders, which impacts how they lend you money.
If you have investment loans or want to borrow money, this means it will likely impact you. These sudden changes to bank policies and interest rate settings are quite significant.
What does APRA do?
APRA oversees lenders and other institutions such as insurers, fund managers, and the superannuation industry, etc.
In short, for the purposes of our industry, they make sure lenders play by the rules and that when lenders make financial commitments to us, it is done so within a stable, efficient and competitive system.
Why has APRA been in the news?
In December 2014, APRA sent a communique to lenders outlining steps to reinforce sound residential mortgage lending practices . One of their recommendations was directed towards growth in lending for property investment. APRA suggested “growth above 10% pa will be an important risk indicator in considering the need for further action”.
Currently many lenders are far exceeding the 10% growth APRA has targeted, some growing by as much as 40% year on year. To reduce this level of debt growth they have applied pressure to lenders to make adjustments to their policies, primarily targeting the borrowing capacity of investors, but also other areas such as limiting the ability for lenders to negotiate investment interest rates below the advertised rates and increasing deposit requirements through reduced available loan to value ratios (LVR’s).
In simple terms, they are requiring lenders to exercise caution with how much they lend for investment.
Why has APRA done this?
A big percentage of Australian property investors live in Sydney and Melbourne. Residential properties in those markets have recorded solid growth over the past 12-18 months. Additionally, interest rates have been very low. This leads us to a very simple equation…
High Property Value + Low rates = strong borrowing conditions
Strong borrowing conditions = investors buy more property
And this is what has been happening (together with the growth in purchasing by overseas investors).
Investment lending had been growing at over 20% pa and this is seen as unsustainable and could lead to issues when interest rates eventually started rising (and property prices in some markets flattened).
APRA needs to see heat taken out of the investment lending market.
How have lenders responded?
- Each lender has approached this APRA-led change differently.
- Some lenders have stopped offering discounts on new investment loans
- Some lenders have increased rates on EXISTING investment loans or interest only loans
- Some lenders have reduced the Loan to Value Ratio for investment loans (i.e., the % of the property price that they will lend)
- Some lenders have stopped investment lending
- Some lenders have changed how they assess NEW loans by applying higher interest rate buffers to new and existing loans OR by removing / reducing the impact of negative gearing benefits
- Some lenders have not made any changes at all
What does this mean for you?
The lending market has become more complicated as there is now more diversity of policy and risk appetite among lenders. However, lending conditions are still OK and Australia still has a very competitive lending landscape.
This emphasises why most Australians now choose a mortgage broker to look after them.
inSynergy is working overtime to ensure it stays on top of all these changes as they are announced and as they ‘wash through’ the marketplace.
Should you wish to know how your bank has responded to these changes and how it may impact your lending portfolio, please feel free to get in touch with us at the office on 1300 308 808 or via email at email@example.com