Australian Banks Forced to Reduce Property Loans Due to Strict New Loan Standards
New loan standards put forward by the APRA (Australian Prudential Regulation Authority) last month have forced banks to cherry pick individuals that want to purchase homes in Australia. The tougher new loan standards were put in place to let off some steam in the booming property market.
The new standards required that the big four banks in Australia, in addition to Macquarie Bank, must hold greater capital against mortgage loans. The intention of this move was to offer greater protection against defaults, thereby reducing the chance of housing financial crises similar to one that occurred in 2008.
In reaction to the new standards, the Australian banks have raised interest rates on loans to cover greater funding costs. Moreover, they have also put in place stricter deposit requirements for giving loans to the individuals.
For instance, an investor that wants to purchase a property worth $1 million could be required to prove that they can generate about $22,500 per year on assumption of 20% minimum cash deposit. Similarly, an investor that wants to purchase a property worth $500,000 could be required to prove that they can generate $12,300 per year.
Impact of New Loan Standards on Property Values
The introduction of new loan standards is a move made by the financial and banking regulatory authority to clamp down on speculative housing investment. Availability of cheap property loans had contributed to higher property prices in Sydney, Canberra, Victoria, Melbourne, and other desirable locations in Australia. National property prices rose by 10% in the past year led by Sydney area where property prices increased by nearly 15%. Although property prices in Hobart, Brisbane, Adelaide and Perth had remained somewhat the same during this period.
Investors with high cost loans will be affected the most by the new loan standards. It will not have a significant impact on investors that have low debt and hold multiple properties across Australia.
Moreover, people that do not have significant cash buffer to cover the mortgage cost will have difficulty in obtaining mortgage loans. They have to focus on buying cheap properties or raise their loan to value ratio. The end result will be less competition in the housing market leading to decreased property values.
The changes in property loan standards put forward by the APRA have been welcomed by international financial agencies. A reputed credit rating agency has stated that the initiatives are welcomed as they will reduce exposure of local banks to high risk property loans.
Recent statistics show that new property loans put forward by banks have gone below the APRA’s growth limit. The additional lending requirements have put constraints on banks that prevent investment funding.
Are you looking to expand your property portfolio and navigate through the new property loan regulations? Contact a financial advisor to avail the best property investment decision suited to your requirements.