APRA move signals the Bank of Mum and Dad to become a key Aussie lender

Oct 08, 2021

Shots were fired this week by Australian Prudential Regulation Authority (APRA), signalling the Bank of Mum and Dad will play a larger role in mortgage financing as home lenders make it harder for first home buyers to get a mortgage. One in five borrowers in the June quarter were borrowing more than six times their income (up from 3-4 times several years ago), raising red flags that serviceability might not be in check at higher interest rates. 

When surveyed, 78% of the Starts at 60 audience said they had helped their children get on the property ladder, with another 7% saying they plan to in the future so this is a real issue for the country.

APRA wrote to lenders asking them to adopt a serviceability buffer of “at least 3.o percentage points over the home loan interest rate,” up from the previous level of 2.5%, meaning banks will only be able to grant loans where they believe the borrowers are able to afford their mortgage payments if interest rates rise by 3%. New variable owner-occupier home loan rates for those borrowing over 80% Loan-to-Value (LVR) are currently offered at approximately 2.75% in Australia, meaning the serviceability level today is likely to be calculated at an interest rate of approximately 5.75%. 

APRA says: “The buffer provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses.” It also signals a rapid rise in interest rates is likely in the months and years to come as markets recover from Covid-19.” 

There’s no doubt that the impact will flow on to the parents of older children looking to enter the housing market, who have had to play a larger role as median house prices have risen in recent years.  Parents wanting their children on the housing ladder have supported them by becoming a  guarantor on home loans and/or offering loans or gifts to fund their deposits and some parents have even bought their children houses outright.  A survey conducted in May 2021, showed up to 60% of parents surveyed considered helping their children buy a home. The Bank of Mum and Dad is widely recognised as the ninth biggest lender in Australia.  Most of the big banks now recognise this and have developed products and services to support parents’ role in financing a child’s home. 

Australian house prices are reported by Domain to have reached $955,927 in August’21, up 5.8% for the quarter and 18.8% over the year. 


Read more: Three things you should consider before opening the Bank of Mum and Dad

 

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

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