Home loan rule changes coming on November 1 as property prices surge at fastest pace since 1989

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Australian borrowers face new hurdles getting a home loan from today with banks required to more strictly assess how they would handle a steep mortgage rate increase.

A professional earning an average, full-time salary of more than $90,000 a year is already in mortgage stress paying off a typical Australian home despite interest rates being at record lows.

Rising property prices have seen more borrowers sink into arrears on their mortgage, where they are 30 days or more behind on their repayments. 

The Australian Prudential Regulation Authority, the banking regulator, last month announced that from November 1, lenders would have to calculate a customer’s ability to cope with a 3 percentage point rise in mortgage rates.

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Australian borrowers face new hurdles getting a home loan from today with banks required to more strictly assess how they would handle a steep mortgage rate increase (pictured is auctioneer Karen Harvey accepting bids for a Hurlstone Park house in Sydney's inner west)

Australian borrowers face new hurdles getting a home loan from today with banks required to more strictly assess how they would handle a steep mortgage rate increase (pictured is auctioneer Karen Harvey accepting bids for a Hurlstone Park house in Sydney’s inner west)

In the year to October, Australia’s median property price surged by 21.6 per cent to $686,339, with new CoreLogic data showing the fastest annual increase since early 1989.

That means someone buying a typical home, with a 20 per cent mortgage deposit factored in, would owe the bank $549,071.

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A borrower on an average, full-time salary of $90,329 would already be in mortgage stress, where they would struggle to pay their bills, because APRA considers a debt-to-income ratio of six or more to be risky.

New lending rules explained

From November 1, lenders have to model a borrower’s ability to cope with a 3 percentage point increase in their mortgage rate

Previously, the test was a 2.5 percentage point increase in loan rate

A borrower pay off a typical Australian home, worth $686,339 with a 20 per cent deposit, would pay an extra $935 a month if mortgage rate rose from 2.29 per cent to 5.29 per cent

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Even with a low 2.29 per cent home loan rate, fixed for three years, this borrower would owe the Commonwealth Bank $2,111 a month.  

Under the new rules, a borrower would have to assess how this borrower would cope with their mortgage rate rising by 3 percentage points to 5.29 per cent, which would see their monthly repayments rise by $935 to $3,046.

Before today, the banks had to assess how a borrower would cope with mortgage rates going up by 2.5 percentage points. 

Even with two income earners, borrowers are having to closely watch their budget with Moody’s Investors Service calculating Australian households on average were dedicating 25.1 per cent of their monthly income towards servicing their monthly mortgage repayments in September 2021, up from 23 per cent in September 2020.

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Sydney’s median house prices has surged by 30.4 per cent during the past year, to an even more unaffordable $1.334million.

So with a 20 per cent deposit of $266,753, a borrower would most likely be unable to pay off a $1.067million mortgage without being in mortgage stress unless than earned $178,000 a year or were buying with their working spouse.

RateCity research director Sally Tindall said someone bidding for a house at auction needed to be mindful of the new lending rules

RateCity research director Sally Tindall said someone bidding for a house at auction needed to be mindful of the new lending rules

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House prices keep surging in Australia

SYDNEY: Up 30.4 per cent to $1,333,767

MELBOURNE: Up 19.5 per cent to $972,659

BRISBBANE: Up 24.8 per cent to $731,392

ADELAIDE: Up 22.5 per cent to $591,558

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PERTH: Up 16.7 per cent to  $550,044

HOBART: Up 27.2 per cent $726,955 

DARWIN: Up 17.1 per cent to $567,056

CANBERRA: Up 29 per cent to  $985,040

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Source: CoreLogic data in median house price increases in the year to October 2021 

In May, 1.61 per cent of borrowers across Australia were in arrears, where they were 30 days or more behind on their mortgage repayments, Moody’s data showed.

Western Australia had the highest delinquency rate of 2.35 per cent. 

RateCity research director Sally Tindall said someone bidding for a house at auction needed to be mindful of the new lending rules.

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‘Anyone intending to bid at an auction in the next few months should call their bank to double-check how much they can borrow,’ she said. 

‘While the big banks have all said they’ll honour pre-approvals, if your circumstances have changed you might have to start from scratch under the new rules.’

New Australian Bureau of Statistics data released on Monday showed a 1.4 per cent drop in the value of new home loan commitments in September, with new owner-occupier mortgages falling 2.7 per cent.

But the value of investor loans increased by 1.4 per cent, reaching the highest level since April 2015. 

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The surge in property prices is turning off first-home buyers with their ranks plunging by 5.6 per cent in September, marking a 27.1 per cent fall since January. 

The Reserve Bank of Australia has promised to keep the cash rate on hold at a record low of 0.1 per cent until 2024 ‘at the earliest’ but Westpac bank is forecasting a rate rise in February 2023.

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