Rising interest rates aren’t the only reason why it’s harder to get a home loan

To ease the inflation currently bearing down on the economy, the Reserve Bank of Australia (RBA) has finally begun tightening monetary policy, lifting the official cash rate by increments of 25-50 basis points over the last three months. 

A rapidly changing interest rate environment means banks will be scrutinising borrowers’ income and finances much more closely. If you’re not equipped to handle higher rates on your home loan, you’ll find banks will be less willing to lend you the amount you want. 

And with further rate hikes looming on the horizon, Westpac projects up to 90% of borrowers will feel the mortgage heat this year. 

But rising interest rates aren't the only challenge borrowers have to contend with. We look at some of the additional hurdles that have popped up in recent months, along with some steps buyers can take to overcome them.

Even before any rate rises were announced, industry regulator APRA was projecting unease thanks to an uptick in risky lending last year. The solution it arrived at was introducing stricter serviceability buffers.

Nowadays, lenders are required to add a margin of at least 3% (up from 2.5%) to their home loan rates when gauging a borrower's creditworthiness. That means if you apply for a loan with a variable rate of 3% p.a., you’ll be assessed on your ability to pay it off at 6% p.a.

But that’s not the only change to lending standards we’ve seen. Fear of overexposure to risky loans, not to mention reprisal from APRA, has also driven some banks to adopt stricter protocols around debt-to-income ratios.

Last month, ANZ lowered its DTI limit from 9 to 7.5, meaning that it would no longer be lending more than seven-and-a-half times a borrower’s income. NAB also revised its DTI cap to down from 9 to 8, citing a need to be vigilant about potential mortgage stress.

These changes ultimately limit the amount of funding borrowers will be able to access, meaning that many will have to set their sights on less expensive properties. Some may even find themselves discouraged altogether.

Another major drain on borrowing power has been the broadening definition of ‘debt’. While loan and credit card debt are old hats, new APRA regulations have expanded what lenders must consider when servicing your home loan.

From now on, any debt you owe to Buy Now Pay Later (BNPL) services like Afterpay, Zip, or Klarna must be included in DTI serviceability tests. This has taken a lot of potential borrowers off guard because BNPL tends to be seen as an expense rather than a line of credit. As a precaution, Afterpay recommends customers close their accounts temporarily while applying for a home loan then reopen them after approval.

Lenders must also officially look at your HECS-HELP student loan debt, the index of which ballooned by a whopping 550% this year. While this was quite a common practice before the new regulations, its inclusion from APRA formalises its role as a significant debt to deal with – and further tightens lending restrictions. 

What’s more, these kinds of debt tend to be most common with young Australians. By increasing the level of debt they hold, APRA has added yet another economic hurdle for young buyers on the road to first home ownership.

Then there’s the elephant in the wallet – inflation. The rising cost of living has reduced the buying power of ordinary Aussies with their groceries, let alone their home loan. According to the Australian Bureau of Statistics (ABS), spending on non-discretionary items rose 8.6% in May, meaning buyers have had to fork out more cash just to afford basic life necessities.

Inflation also tightens the overall wiggle room borrowers have for making monthly repayments, regardless of which kind of home loan they’re paying off. Unprepared consumers may find themselves having to cut corners, or worst case scenario, going into mortgage stress.

Younger Australians can be forgiven for thinking the odds are stacked against them, but there are workarounds to these challenges.

For starters, there are a number of government schemes aimed at helping Australians buy their first home. These include the First Home owners Grant, the First Home Loan Deposit Scheme, the First Home Super Saver, and the Family Home Guarantee.

Shared equity schemes, like the Labor government’s new Help to Buy scheme, are also becoming more common. These reduce the upfront costs of buying a home by letting households enter a co-ownership arrangement with the government.

Finally, hopeful borrowers should take steps to reduce their risk profile in the eyes of lenders. This might include paying off existing debts, saving a larger deposit, tidying up credit histories, and being mindful of the impression your investment portfolio might give off.

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