APRA increases borrowing affordability rate

The Australian Prudential Prudential Regulation Authority announced on Wednesday October 6th that the affordability rate applied by banks when assessing credit will be increased. nd out

What is an affordability rate?

An affordability rate is the interest rate used by banks to assess loan applications. Instead of assessing affordability the actual rate the customer will pay, banks use a higher rate to ensure there is a buffer for both rising interest rates, and any unforeseen changes in borrowers' financial circumstances.

What are the changes?

The current minimum affordability rate is 2.5% above actual rate, which will now be increased to 3%.

What does this mean for borrowers?

What this means is that on paper, the cost of any loans will increase in turn reducing the borrowing capacity of the applicant. In an environment where affordability was already tight due to the high growth in the property market, the likely outcome is that those who needed to stretch themselves to get into the market may now not be able to borrow the amount they need to buy at the level hoped.

This will also impact existing debt, particularly for investors, where borrowers are seeking to extend an interest only period or refinance existing loans, as these will now be assessed at a higher rate than they originally were.

What does it mean for the property market?

The likely outcome is a cooling impact on the property market which has recently seen record growth. With less borrowing power and therefore buying capacity in the market, demand for properties should decrease and growth is expected to slow.