Michael Tait – Director and Strategic Finance Consultant
Ph. 08 8311 3714 M. 0421 647 933
Traditionally the Reserve Bank of Australia’s mandate has been to contribute to the stability of the economy by adjusting the cash rate, however there’s been a steady decline in their effectiveness since late 2014. This is set to change off the back of proposed changes by APRA (Australian Prudential Regulation Authority); in an effort to stem downward pressure on housing prices in the Eastern States and also stimulate the lacklustre economy nationally, the RBA is about to once again have it’s time in the Sun.
Historically, when the RBA has reduced the cash rate this has driven an increase in demand for credit, which has injected funds into the economy and stimulated growth. Things started to change when APRA (Australian Prudential Regulation Authority) began a passive-aggressive campaign to tighten lending standards along the lines of “In our view a prudent lender would do/not do ‘x’… by the way, we control your banking license and capital requirements.”
The ensuing tightening of access to credit created an environment where even if demand for credit increased due to low interest rates (thank you RBA), the economy wasn’t being stimulated because people who wanted to borrow money no longer necessarily qualified for the loan they were applying for. Cheap capital means nothing if the bank can’t lend it to you.
APRA have now written to banks outlining a proposal to change the way that safety margins are built in to calculating how much someone can afford to borrow. The proposal would change the way safety margins are calculated when assessing someone’s borrowing capacity and instead of assuming an interest rate of 7.0%-8.0% build a buffer of 2.5% above the prevailing interest rate of the loan being applied for. This means that for a home loan rate of 3.7% an assessment rate of 6.2% would apply (typically previously 7.25%).
At currently available interest rates, and depending on their circumstances, we’d expect this change to increase a family’s borrowing capacity by nominally 10%. This increase in availability of credit will hopefully stimulate the economy, stabilise the housing market and ideally kick off some much needed growth in wages. If implemented, APRA’s proposal will return the RBA to relevance (perhaps more so than ever) as future changes to the cash rate would drive both appetite for, as well as access to credit.
Now more than ever, it’s important to seek advice when making financial decisions. If you’d like to work through your current circumstances or discus your future goals please reach out. We’re here to help.