Via the excellent George Theranou at UBS:
With actual mortgage rates of ~4% + the new 2.5% buffer, the assessed borrowing rate is likely fall to ~6.5%, below the ~7¼% floor, ‘notionally’ increasing borrowing capacity by ~8%. If the RBA also cuts & mortgage rates decline to 3.5%, borrowing capacity rises ~14%. However, given the RBA’s view “most borrowers do not borrow the maximum … available”, & slowing credit was mainly “reduced demand for credit, rather than reduced supply”, they presumably expect limited impact. Furthermore, as lenders are likely to continue to move away from using the HEM benchmark & towards full verification of living expenses – to comply with responsible lending laws – we estimate an increase in assumed HEM expenses of just 5-12% would offset this easing.
Importantly, we haven’t seen full implementation of Comprehensive Credit Reporting (from Sep-19), or limits on high Debt-to-income (>6x) loans, with APRA directing ADIs to “develop internal risk appetite limits on the proportion of new lending at very high DTI levels”. Given this is likely to become a new binding constraint for many borrowers – in addition to higher living expenses – we’re watching for potential easing here too.
