When they go to the credit union, building society or bank to get a home loan, borrowers have to prove their ability to “service” their loan over the term of up to 30, and sometimes 40, years.
“Serviceability” is the banking and regulatory term for borrowers’ ability to prove to their lender that they can not only pay back the loan amounts, but they can also live on the income they declare to the lender.
Part of proving this serviceability is that the lender will take your living expenses, any other loans, the cost of servicing the new loan and then add an interest rate buffer to work out whether you can still live and pay back the loan if interest rates rise.
Normally this buffer is in the vicinity of 2% above the prevailing interest rate on the loan:
But with interest rates at generational lows in Australia, documents released under Freedom of Information – and reported in the SMH this morning – show that the RBA is either worried that rates are about to rise significantly or that borrowers are over-committing at low rates.
Luci Ellis, the head of the RBA’s Financial Stability Unit and one of the foremost global authorities on housing prices, wrote in July last year that:
Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low… This could be introduced either as a prudential measure or as part of the National Consumer Credit Code, or both.
The point is to make it harder for a borrower, at least a marginal one, to prove they can service or pay back that loan and in doing so, make it harder for borrowers to get those loans.
It’s an approach that both RBA governor Stevens and his deputy Phil Lowe seemed to have sympathy with last Friday when appearing before the House of Representatives Standing Committee on Economics and it signals that it just might be about to get even harder for new buyers to enter the market.
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