APRA increases servicing buffer

APRA increases the serviceability buffer lenders use when assessing a loan.

On 6th October 2021 APRA (Australian Prudential Regulatory Authority) announced changes to the serviceability buffer banks are to use when assessing a new loan. The buffer is to increase from 2.5% to 3% from the 1st of November 2021.

So, who is APRA?

APRA (Australian Prudential Regulatory Authority) is the government body that regulated the Financial Services Industry. It was established on the 1st July 1998, the focus was to protect the Australian community from financial misadventure, the APRA objective is to Protect Today and Prepare for Tomorrow.

Back in December 2014 APRA provided guidance to Australian lenders that they needed to implement a minimum interest rate of 7 to 7.25% when assessing new debt, this meant that a buffer was used in case of an increase in interest rates. Serviceability is a lending term, the way lenders confirm a borrower can afford a loan.

As interest rates dropped the buffer was deemed to significant and too much of a barrier to borrowing affordability, so in July 2019 APRA amended the guidance to reflect a buffer of a minimum of 2.5% on top of the loans actual rate.

This new amendment is to increase the buffer from 2.5% to 3%.

Why now?

In the June quarter of 2021 over 20% of new loans in Australia were assessed at having a Debt to Income Ratio (DTI) in excess of 6 times gross income, this is seen as extremely high in Australia but also Internationally so the change is designed to protect Australians from being able to borrow more than they can afford should interest rates rise over the coming years.

By way of an example, if you applied for a loan of $1,000,000 P&I over 30yrs with an interest rate of 3%, the actual repayments would cost $4,211 per month, however, under the current rules, a lender would assess the cost as $6,302 per month /m, or a buffer of $2,091 per month. Under the new rule, the lender would assess at a 3% buffer, the serviceability cost would increase to $6,719 per month, or a buffer of $2,508 per month, being an increase of $417per month.

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