The Australian Prudential Regulation Authority (APRA), our lending regulator, has announced new changes to lending rules for banks.
They told banks and other authorised lenders that from November borrowers will need to be able to meet repayments at least 3 per cent higher than the loan product rate to receive a loan.
If, for example, you apply for a mortgage with an interest rate of 2.5 per cent, the bank must now assess that you will still be able to make repayments if the rate rises to 5.5 per cent – rather than the previous serviceability assumption of 5 per cent. 
APRA’s decision reflects their growing concern that high-debt home loans among new borrowers could lead to financial instability.
It seems like the regulators are aiming to gently apply the brakes to the housing market, rather than slam them on.
The new 3 per cent buffer rate does not apply to non-bank lenders. However, APRA is considering including them later this year.
According to APRA, the changes mean the maximum borrowing capacity for the average borrower will reduce by around 5 per cent.
| Base variable rate | Old stress test rate | New 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% |
Source: RateCity.com.au
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 decision is backed by Treasury, the Reserve Bank of Australia, and the Australian Securities and Investments Commission, which together make up the Council of Financial Regulators.
Mortgage stress test explainer: 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.
There could be more macroprudential controls to come.
This increase in the serviceability buffer comes ahead of a broader information paper, due in the next couple of months, that will outline APRA’s approach to macroprudential policy in more detail.
Further measures, specifically debt to income limits are a possibility with APRA signaling this by requesting lenders “review their risk appetites for lending at high debt-to-income ratios ” and that further macroprudential measures would be considered if concentrations of high debt-to-income loans continue to rise (currently around 22% of new loans have a debt-to-income ratio greater than 6x).
Some expert commentary
RateCity.com.au 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.
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."
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Canstar’s financial expert, Steve Mickenbecker commented:
“New home lending continues to boom, up 47 percent from a year ago, while house prices are up by around 20 percent, meaning borrowers are taking on bigger loans.
Competitive and still-falling interest rates and the move by two large lenders to reduce their interest only rates, evidence just how eager banks are to lend into this boom market.
APRA’s move today is forward-looking to account for future interest rate rises down the track. Large loans affordable at today’s rock-bottom rates can become stressed loans when rates are four or five percent higher.
APRA’s objective is to identify borrowing that will potentially risk future mortgage stress, before it becomes a loan.
APRA is tackling stability rather than housing prices, but it must also be hoping that lower lending volumes may dampen housing prices.
First home buyers whose income is stretched by repayments will inevitably find it tougher to get into the market, but the move does no damage to first home buyers' ability to save a deposit- their major pain point.
Investors who ration equity across multiple loans may be more impacted, with lenders required to factor in the increased buffer against existing loans when assessing serviceability for the new application. This may mean less crowding out of first home buyers in the market.
The increase in the buffer is a start from APRA but further measures would not surprise if the market booms after lockdown as many expect."
HIA’s Chief Economist, Tim Reardon commented:
“Over 90 per cent of renters aspire to own their own home but less than half of them expect that they will ever achieve this goal. Today’s announcement by APRA will make this goal even harder.
Australia has an unquestionably strong financial sector.
It has withstood significant shocks, such as the Global Financial Crisis and the COVID recession, without the emergence of financial contagion.
The share of loans that are impaired is exceptionally low, at around 0.4 per cent of all loans issued.
This is significantly lower than in other developed economies.
The very low levels of mortgage delinquency in Australia reflect the restrictive lending regulations imposed by financial regulators in Australia.
Since 2010, financial regulations have made it increasingly conservative making it progressively more difficult for first home buyers to enter the market.
Despite the lows levels of mortgage delinquency, APRA announced this morning that it has increased the ‘serviceability buffer’ for a new mortgage from 2.5 per cent to 3 per cent.
First home buyers accounted for 35 per cent of owner occupier loans issued in August 2021 and these measures will make it harder to access a loan.
This additional constraint is being imposed despite the share of loans with a 10 per cent deposit or less declining since December 2020.
This share is well below those observed over the past decade.
First home buyers are the group who are typically constrained by serviceability thresholds.
It is this group that will be hit the hardest by these changes.
Restricting access to credit for new households seeking to enter the housing market will put further downward pressure on the rate of home ownership in Australia."
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