With Australian interest rates at an all time record low (currently the RBA cash rate is 2.0 per cent), recent guidelines released by the Australian Prudential Regulation Authority (APRA)*, new borrowers may see a tightening of credit being released by lenders.
This is being brought about by changes to the serviceability models used by lending institutions where we will see more focus on household expenses during the application process.
The rationale behind this change is due to speculation of a housing bubble in Sydney and Melbourne; global concerns from bank regulators on the way banks assess risks, and our current appetite to take on more credit.
So, how might this affect you?
If you are seeking finance, the institution will use a borrowing range of between 7.2 and 8.0 per cent when undertaking their assessment and will want to explore not just your general living expenses but additional expenses under categories such as:
- Education tuition costs
- Entertainment costs (i.e. Foxtel, Casino, Sporting Memberships);
- Interests or Hobbies; and
- Household Management and Maintenance (i.e. cleaner, pool cleaner
In my opinion, this is a prudent approach as each household’s expenses differ and each individual situation should be taken into consideration.
Further examples of credit tightening will include policy changes for residential loans for investment purposes where lenders are now reducing their maximum loan ratio on investment loans to 90 per cent.
So, how can you minimise the effect?
When looking to borrow, ensure that your initial calculations are done using the same borrowing range of between 7.2 and 8.0 per cent which will allow for fluctuations or changes to your own circumstances.
Additionally, look at your general living expenses including those additional expenses that the lending institution may want to know about and determine if they are a need or a want. Can you live without it thereby allowing you to meet your lending goal?
* APRA is the governing body for all banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation industry.