First time homeowners looking to get into the property market are paying down credit card debt and personal loans so that they can borrow more after APRA today reduced borrowing power by 5 pe cent.
On a million dollar mortgage, that would mean the average loan would be reduced by $50,000 – a hurdle in a housing market that is facing soaring prices.
The Australian Prudential Regulation Authority (APRA) made the move today, writing to banks telling them to increase the “serviceability buffer” by 0.5 percentage points from 2.5 per cent to 3 per cent to take some heat out of the housing market.
This will reduce the maximum borrowing capacity for the typical borrower by 5 per cent.
Industry experts had already expected there to be a crackdown on mortgage size relative to income, with borrowers expected to face increasing hurdles. The problem – lenders had been dolling our loans at 6 times income.
APRA has decided not to implement debt-to-income limits for those paying off loans and credit cards for now which were being speculated as a potential move. It said this could have resulted in higher interest rates for some borrowers because lenders would have lifted rates to ration credit to get under the limits.
According to Canstar, debt to income ratio is a measure that is used by lenders when you apply for a home loan or personal loan and can be used to help you determine if your debt is spiralling out of control.
APRA earlier this year released figures that revealed 22 per cent of mortgages in the June quarter where at least six times the income. This is up on 16 per cent of mortgages a year ago.
Mortgage brokers note that it is rare that banks would lend more than six or seven times a person’s income.
Domain spoke to Shore Financial CEO, Theo Chambers who said, “There are only a few lenders that would entertain going above six or seven times.
“It’s possible but it’s definitely hard.
“People are pushing the envelope as much as they possibly can in terms of growing their maximum. Most people are chopping up credit cards, paying out personal loans, doing everything they possibly can to meet the guidelines.”
Finder Home Loans Expert, Sarah Megginson shares the belief that paying off debt will help you when you want to buy a property.
“Every dollar you owe in personal debt reduces the amount a bank is willing to lend you. For instance, a $5,000 credit card limit could reduce the amount a bank will lend you by $20-$25,000.
“The best way to increase your borrowing power is to reduce your other debts. If you can pay off any personal loans, car loans, credit cards and store cards, you’ll boost your borrowing power.”
She adds that it’s really important to review your credit score and to make sure it’s sparkling. Finder has a free credit score checker in their app.
“Look for any issues you can fix; the better your credit score, the greater your chance of getting approved for a home loan with a lower interest rate, which can translate to a bigger borrowing power.”
Whilst the big four banks will only lend six to seven times a person’s income, there are other options available.
You can go to a non-bank lender for a low-doc home loan. A low-doc home loan is a loan that doesn’t conform to the usual lending criteria.
Ms Megginson says: “The conditions for low-doc home loans are more restrictive than standard residential loans since they present a higher level of risk for the lender.
“Generally, you’ll need a minimum of 20 per cent deposit, whereas with a normal loan you might be able to borrow with a 10 per cent deposit, or in some cases just 5 per cent. This is because it’s harder to borrow more than 80 per cent of the property’s value with a no doc loan.”
She adds: “Non-bank lenders are very competitive and, in many cases, can offer interest rates and loans that are cheaper or offer better value than big four banks.
“It’s always worth doing your research, as some of the smaller banks and non-bank lenders are actually owned by bigger institutions.”
Head of Lending at Volt Bank, James Green says that timing is not important when it comes to home ownership for first home buyers.
“Buying now is usually less than what you pay in rent, so buying most likely reduces your cost of living.
“I’ve seen more people miss out because they were waiting for the market to fall then I’ve heard of people buying bargains in depressed markets.
“Buy the property you want to live in. Enjoy it. No, love it and then it’s a good place for a first home buyer to buy in.”