Two recent announcements regarding proposed changes in Government (and Government agency) policy settings are targeted at assisting certain purchaser borrowers in the residential property market. Those announcements are:
- the Federal Government’s proposed First Home Loan Deposit Scheme; and
- APRA’s proposed changes to its guidance to ADIs regarding the interest rate assumptions used by ADIs in assessing potential borrowers’ ability to afford their repayment obligations.
The First Home Loan Deposit Scheme
One of the policies the Government took to the 2019 Federal election was the First Home Loan Deposit Scheme, which is a scheme to assist first home buyers in getting into the property market earlier by allowing eligible first home buyers to access the market with a deposit as low as 5%.
Under the Scheme, the National Housing Finance and Investment Corporation will guarantee loans up to a value of 20% of the home (in effect acting as a mortgage insurer). The guarantee will last until the homeowner refinances the loan (or for the life of the loan where no refinance occurs). The corporation will partner with private lenders to deliver the Scheme, prioritising smaller lenders to boost competition. The Government expects the Scheme will allow eligible borrowers to save around $10,000 in mortgage insurance.
Proposed Scheme Eligibility Criteria
- The Scheme will start on 1 January 2020
- Eligible borrowers are first home buyers who have an income of up to $125,000 (or $200,000 for a couple), and who have been able to save a deposit of at least 5%.
- Eligible properties that can be purchased under the Scheme are to be determined on a regional basis, having regard to the differing property markets across the country.
The legislation giving effect to the Scheme has not yet been passed by Parliament, but the Australian Labor Party announced during the election campaign that it would match the Government’s policy.
APRA’s proposed amendment to guidance on mortgage lending
The Australian Prudential Regulation Authority (APRA) has written to deposit-taking institutions (ADIs) with a proposal to remove its current guidance that ADIs should assess potential borrowers’ ability to afford their repayment obligations using a minimum interest rate of 7%. Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments. APRA proposes that ADI serviceability assessments should incorporate an interest rate buffer of 2.5 per cent.
Based on a current average variable mortgage rate of around 3.8%, if those proposed changes are made, they could significantly lower the rate that ADIs use for assessing potential borrowers’ ability to afford their repayment obligations, thus increasing the maximum amount that potential borrowers could borrow.
APRA’s four-week consultation process closes on 18 June 2019, following which APRA will release a final version of their updated ADI guidance note.