The Council of Financial Regulators wants to reduce the risk within the Australian mortgage sector. Reducing the growth of residential investment mortgages is one of the goals set out by APRA, who noted that areas of specific prudential concern include:

Higher risk mortgage lending - Which includes high loan to value ratio loans, interest only loans, and high loan to income mortgages.

Growth in investment mortgages - APRA wants to limit growth of investment mortgages to 10% per annum. A growth rate above 10% would increase the risk factor

Loan affordability tests - When banks assess how much new borrowers can afford, APRA wants them to use a minimum buffer of either 7% or 2% above the rate of the mortgage they are applying for. This means if you are applying for a new home loan with a rate of 4.5%, the bank will test your ability to make repayments at 7%

For now, the changes seem to be centered on investment loans, and while a lot of banks have made changes, not all of them have. In theory this should cause investors to take out home loans with banks who do not charge an investment premium or who still allow them to make a purchase with less than a 20% deposit.

Some investors may also decide to move their existing home loans to a lender who is offering better rates to investors. Our guess is that this is intentional. Banks who are worried about exceeding the 10% growth rate for residential investment mortgages, are trying to make themselves less competitive. AMP who has already grown by more than 10% this year, is no longer accepting new applications from residential investors.

Borrowing Will Become Harder for Everyone

We think that the Australian mortgage industry will continue to go through a period of change. Unfortunately these changes will make it more difficult for us take out home loans. We don't have a crystal ball, but we expect that future changes could impact.

Interest Only Home Loans

NAB has already increased the rate they will charge to all interest only loans. We would not be surprised if other banks follow suit. Interest only loans are considered more risky, and we expect that they will soon be made less attractive when compared to principal and interest home loans.

Borrowing Limits

Minimum assessment rates will be set, but we are also expecting that the banks will adjust they way they calculate our lifestyle expenses. Currently most banks use the household expenditure method, which assumes that a married couple will incur expenses of $2,200 per month plus an extra $427 for each dependent child. We expect that this method will be adjusted to reflect that fact that people on higher incomes also have higher lifestyle expenses. These changes will reduce our borrowing limits for new home loans.

Negative Gearing

The Reserve Bank of Australia has stated that there is a 'case for reviewing negative gearing', but not in isolation. The generous tax concessions given to investors has been a polarizing topic. Investment related expenses, including interest on loans, should be deductible. However the regulators are worried that some people are buying properties with the sole goal of reducing their taxable income. Negative gearing is a polarizing issue, and any changes will be met with an abundance of opinions explaining why the changes are both right and wrong.

Only Time Will Tell

The extent and timing of future changes is unknown to us. The Council of Financial Regulators will continue to watch the market and make changes they feel will make Australian mortgages less risky. We can't say what the next change will be, but we will be watching with interest and will write about it after it happens.

We'd love to hear from your thoughts in the comment section below. What changes do you think will come? Will they help improve the Australian market?