Lending restrictions implemented in recent months are attempting to address housing affordability and prevent the onset of mortgage stress in many Australian households. The restrictions mean lenders have more responsibility than ever before.
But what are these lending restrictions? And how will they potentially affect you?
Here, I investigate some of the changes.
Lending restrictions explained
One aspect of responsible lending is the restriction on interest-only loans. Lenders now encourage you to pay the mortgage down by paying principal and interest.
Lending criteria are also tighter than ever. Lenders need to know you can comfortably meet your repayments, even if interest rates rise. Some lenders require you to pass a 2 percent increase test, to ensure you qualify. Some lenders may assess your net income and expense habits.
Will restrictions make it harder for me to get a loan?
Restrictions are in place to ensure you comfortably qualify for your loan. However, this is a positive thing. By assessing your savings and expenses, as well as your income, it helps minimise the risk of mortgage stress if rates rise, or your income changes.
Will restrictions make it harder for me to restructure a loan?
Lenders need to know that you are in a good position to meet your repayments under a new loan arrangement. Lending restrictions mean that interest-only loans will be restricted.
Will my repayments increase?
Your repayments only increase if interest rates rise, or if you switch from an interest-only loan to paying principal and interest when your contract ends.
Earlier this year, the Reserve Bank of Australia found that moving from interest-only to principal and interest potentially increases repayments by around 30-40 percent.
“The rise in scheduled payments amounts to about $7,000 per year for the typical interest-only loan in the Securitisation Database (of around $400,000),” states the Reserve Bank of Australia.
While an increase of this size is significant, it’s worth bearing in mind that paying off principal and interest may mean you pay less over the life of the loan.
“A lot of people switched early because principal and interest loans are now around 1 percent lower, so you may as well pay off the principal — it will be cheaper in the long run,” says property analyst, Pete Wargent.
What can I do to improve my chances of qualifying for a loan?
Lending restrictions are designed to make the housing market fairer and more sustainable. They are not in place to stop you from borrowing. To improve your chances to qualify, you can:
- bump up your savings account
- ensure you have a healthy home deposit
- get rid of any unused credit cards
- pay off debts
- ensure you comfortably pass the 2 percent increase stress test
- buy within your means.
If you are currently on an interest-only loan or are looking to enter the housing market, talk to me now about your situation, and what you can do to boost your chances for a home loan approval.