The APRA’s Tightened Guidelines (And How They Affect First-Time Buyers)

At the beginning of 2017, the APRA altered their guidelines in regard to interest-only home loans. This had massive effects on investors. However, it also affects first-time buyers.

The Australian Prudential Regulation Authority (APRA) oversees many of Australia’s financial institutions. Importantly for property buyers, it oversees most of the banks and lenders that provide home loans.This means that any changes that it makes to its guidelines affect you.In March 2017, the APRA announced some major changes in regard to interest-only loans. These have had widespread ramifications for the entire Australian property market. This article looks at those changes in more depth. But instead of focusing on experienced investors, it looks at the effects of the new guidelines have on first-time buyers.

Explaining the New Guidelines

As mentioned, the new guidelines impact interest-only loans.With an interest-only loan, you only pay the interest on your home loan for a set period of time. Typically, this is between three and five years. The key here is that you repay none of the loan’s principal during this time.There are pros and cons to this type of mortgage. The pros are that you get to reduce your monthly outgoings during the first few years of the loan. That’s why investors favour this type of loan. It helps them to manage their cash flow and further build their portfolios. Experienced investors can also use these types of loans to lower their tax bills. Moreover, some residential buyers use them to enjoy lower monthly repayments.But there are downsides to the loans. The major one is the fact that you still have to repay the loan’s principal within the lifetime of the loan. Once the interest-only period ends, your monthly repayments shoot up. Those who haven’t prepared properly can find themselves in a lot of trouble.This creates risk, which the APRA is averse to. But there’s another issue with interest-only loans. They make it much easier for investors to challenge owner-occupiers in the property market. This has resulted in residential homebuyers struggling to buy the properties that they’re looking for.The APRA wants to change that, which is why it introduced new guidelines.According to these guidelines, lenders must now place restrictions on their interest-only loans. Most importantly, these types of loans can only make up 30% or less of a lender’s new loans. The rest must be more traditional home loan products that see the borrower repaying their principal and interest.But the APRA has also introduced further guidelines within that limit. It encourages banks to do the following:

  • Reduce the number of interest-only loans that have a loan-to-value ratio (LVR) of more than 80%. The LVR is the amount of the loan divided by the lender’s valuation of the property. Assume you’re buying a $500,000 property with a $100,000 deposit. This means your LVR works out to 80%. The higher your LVR, the more risk that’s attached to the loan.
  • Place severe restrictions on the number of interest-only loans with an LVR of 90% or more.
  • Review their serviceability standards to ensure they’re taking on as little risk as possible. Serviceability is the word that lenders use when assessing your ability to repay your loan. A high serviceability means that the lender considers you a low-risk borrower. The opposite is true if you have a low serviceability. Most lenders have their own formulas that they use to calculate serviceability. Typically, these include your income, outgoings, and the interest rate on your loan, among other metrics.
  • Limit their lending in the high-risk sector of the mortgage market. High LVR loans of all types fall under this category. So too do loans to people with low serviceability. Interestingly, loans with very long lifetimes are also seen as high-risk loans.
  • Finally, lenders must ensure that the growth of interest-only and investor loans falls below 10%.

There are several effects that the APRA hope that these guidelines will have.

The Intended Effects

You can argue that the APRA’s guidelines intend to make the property market friendlier to residential buyers. Owner-occupiers have seen themselves priced out of the market in recent years. Investors, both domestic and overseas, have bought up choice properties in the major cities for several years. The problem this causes is that it heightens demand for properties. Sellers can feel confident in asking for high prices because there’s usually somebody there to buy.First-time buyers have especially felt the sting. They don’t have the same financial muscle as property investors to call upon. They have no equity to leverage and can’t sell a property to earn money for another one. As a result, many looking to move away from home must resort to renting. The figures from the 2016 Census showed the problem with this. From 2011 to 2016, the number of Australians who owned their own home fell from 32.1% to 31%. Those renting increased from 29.6% to 30.9%.The lower initial costs of renting make it an attractive alternative to buying. You generally only pay a month’s rent, plus a security deposit, to secure a property. This costs much less than raising a huge deposit. The trade-off is that you don’t own that property. Your monthly rent doesn’t go towards building equity. Instead, it goes directly into the pockets of property investors.That’s not a situation that the APRA wants to see. It would rather have more owner-occupiers with low-risk loans. Property investors with high-risk loans cause more problems. As a result, the new guidelines on interest-only loans intend to cool the growth of the property market.Fewer interest-only loans mean less competition for properties. Sellers have to lower their prices to attract buyers. This makes properties more accessible to owner-occupiers. Ideally, this means that first-time buyers have more of a chance of landing their first homes.The figures from the early parts of 2018 show that the guidelines may have had their intended effects. Property prices have dropped in Sydney while growth has slowed in Melbourne. Many analysts predict a 5% drop or more in both cities by the end of the year.

The Effects on First-Time Buyers

The effects that these guidelines have had resonate with first-time buyers. However, the effects differ depending on what you intend to use your property for.Let’s look at first-time owner-occupiers first. On the plus side, the new guidelines have led to the market cooling in some key areas. This means lower prices and less competition from investors. A first-time owner-occupier can benefit from this. Lower prices mean that they don’t have to raise as high a deposit as they would have previously. Moreover, they may be able to place lower bids on properties and still be in with a chance of getting them.But the guidelines have affected the way lenders treat all mortgage applicants. The guidelines related to reducing risk mean that first-time owner-occupiers may still struggle. Those who raise less than 20% as a deposit may still find it hard to get a home loan. So too may those who don’t have very high serviceability. In fact, many lenders have already tightened their guidelines, particularly when it comes to LVR. First-time buyers often have smaller deposits and try to borrow more. As a result, the guidelines may have had the unintended effect of making it harder to borrow across the board. First-time buyers may struggle to get a regular mortgage, never mind an interest-only one.But what about those who intend to use their first home as an investment property?While it’s certainly not impossible to do that, first-time buyers face even more issues in this area. Simply put, the banks will favour investors who are already in strong financial positions. That knocks many first-time buyers out of the running for investment loans. A first-time buyer will find it much more difficult to get an interest-only loan than before. As a result, the market has gotten harder for novice investors. Those looking to invest without having their own property to act as collateral will struggle to get into the market.This is disappointing news, especially as the APRA hoped to make the market better for first-time buyers with these new guidelines. The stats show a somewhat mixed outlook. In December 2017, home loans granted to owner-occupiers fell by 1% compared to the previous month. Most first-time buyers fall into this category. This perhaps suggests that many buyers have decided to wait for further market softening before making their moves. But those figures don’t tell the whole story. Though there has been a drop, the figures were actually up by 4.4% compared to December 2016. Crucially, a surge in first-time buyers may have been the cause of this increase. Extra incentives offered across several states may be the cause for this uptick. But it’s unlikely that the new guidelines had no effect at all.Moreover, lending to investors dropped by 10.5% compared to December 2016.

The Final Word

So, what is the state of the property market for those looking to buy their first homes?At the moment, it’s becoming increasingly likely that first-time buyers will achieve a stronger position. This is particularly the case for those who’ve saved large deposits and have a strong income. However, those with low deposits may still find themselves struggling.But the property market has felt the effects of lower investor interest. Prices have fallen across Sydney and Melbourne. This makes it easier for first-timers to access properties. Lenders are still adjusting to the guidelines. But the late-2017 surge of first-time buyers suggests the guidelines have helped. A first-time buyer today has more options than they did in 2016. A strong financial base will help with your mortgage application. But you also benefit from less competition when bidding on property.Of course, Cohen Handler is also here to help you along the way. Our buyer’s agents can help you to secure an even better price on the property that you want. Contact us today to find out how.