Tighter lending rules under the banking regulator’s first step to cool the booming housing market will reduce the amount of money people can borrow to buy a home from November 1. The decision was also made to help ensure borrowers could still meet their repayments when rates rise form the current record low.

The announcement has seen some home sellers bring forward their listings in the hope of achieving the best price before the new rules begin as they fear it will reduce the budget of potential buyers. Some potential home buyers are also rushing to the bank or their mortgage broker in an attempt to borrow the maximum amount available to them before the new rule kicks in.

So, what are the changes and how will it impact home buyers?

Under the new rules, property buyers will need to demonstrate they could repay their home loan should interest rates rise by 3%. This is up from the current 2.5%. APRA has estimated the increase in the serviceability buffer will reduce the maximum borrowing capacity for the typical borrower by around 5%.

Realestate.com.au economist Paul Ryan believes it is a sensible first step in addressing concerns about the market. He says, “It’s easy to implement, it’s relatively costless from a borrower perspective, and on a blanket level it reduces how much people can borrow so it will act to slow down the housing market without having a meaningful operational impact on lenders.” 

Comparison site RateCity estimated the average family’s maximum borrowing capacity could drop by $35,025 to $665,475, and by $28,515 to $541,785 for a single person on the average income.

While the change may be difficult for some borrowers to accept, it will ultimately protect them from extending themselves to the max and beyond their means when rates rise, which can only be seen as a good thing.

Change to impact investors more than first homebuyers

As investors commonly stretch their borrowing limit more than first homebuyers as they often have other debts to service, the change is expected to impact them the most. However, the Housing Industry Association begs to differ, believing the changes will make it even harder for renters to achieve their goal of buying a home.

What happens now?

Some banks are still allowing new buyers, or those renewing pre-approvals, to borrow the maximum under the old rules before November 1, when the new rule begins. Borrowers will then have 90 days to use their pre-approval before it expires, meaning buyers will be in the market with larger maximum budgets until the end of January. Other banks, such as CBA and Bankwest, have already changed to the new rules. Banks are also making their own changes, such as being more cautious about how much debt borrowers can take on relative to incomes.

At the end of the day, it may mean you need to consider looking at homes in a slightly lower price bracket than you had intended. But the benefit will be less pressure in the long run as rates will rise eventually.