Navigating the Australian housing market can be a daunting task, especially for first-time home buyers who are often faced with soaring prices and stringent lending criteria. However, a recent change in lending standards could be the key to unlocking the door to a more expensive home for many Australians.
Just a few months ago, the idea of affording a dream home seemed out of reach for many Australians. Now, new figures suggest buyers might be able to stretch their budgets further than they expected.
The federal government recently announced a significant shift in policy: lenders will no longer be required to include Higher Education Loan Program (HELP) repayments in their serviceability assessments for first home buyers.
This means that when calculating a potential buyer’s debt-to-income ratio, HELP debt will be disregarded. This adjustment is poised to potentially increase the borrowing capacity of many prospective homeowners.
According to early estimations, this change could add approximately $25,000 to the average buyer’s budget. This figure is based on the median outstanding education loan for individuals aged 25 to 40, which sits at $23,500, and the average annual HELP repayments of about $5,500.
Associate Professor Ben Phillips from the Australian National University (ANU)’s Centre for Social Policy Research explained that this equates to a significant amount of disposable income that can now be redirected towards loan repayments, thereby increasing the overall loan amount a buyer might be approved for.
‘I’m thinking it’s probably relatively small beer compared to where house prices are. It might help a little bit and it might add to housing demand a little bit. I’d be shocked if this made much of a difference to the macroeconomy as well,’ he added, citing that the extra money would just be a minor increase relative to the overall unaffordability of housing prices.
‘On balance it’s OK, but I wouldn’t get too excited about it.’
While this may seem like a small victory in the grand scheme of the housing affordability crisis, it’s a step in the right direction for many Australians. Chris Foster Ramsay, director of Foster Ramsay Finance, echoes this sentiment, suggesting that for buyers on the cusp of affording their desired property, this change could be the deciding factor that enables them to secure their home.
‘Nobody really knows how much difference it’s going to make. It’s not going to free up a massive amount of money, but it will free up some,’ he said.
However, it’s important to temper expectations. The expected boost to borrowing capacities is relatively modest, and with the Reserve Bank’s cash rate decisions looming, there’s a possibility that any benefit from the change in lending standards could be offset by rising property prices.
If the property market heats up, the additional borrowing power might simply be absorbed by higher home values, rendering the change less impactful.
Moreover, there’s a debate about the wisdom of ignoring HELP repayments when assessing serviceability. HELP debt, while ‘income-contingent and less risky’ than other forms of debt, still represents a financial commitment that affects disposable income.
Some experts, like Dr Chris Martin from the UNSW City Futures Research Centre, argue that policies like this, which aim to increase the purchasing power of first home buyers, don’t address the broader issue of affordability if they don’t also tackle the borrowing power of existing homeowners.
‘All of these things go to increasing the borrowing and purchasing power of first home buyers, but if you’re not doing something about how existing homeowners have their borrowing power increased by rises in market prices, you’re ultimately not doing much for prospective homeowners,’ he explained.
While the dream of homeownership may seem out of reach for some, policy shifts can open new avenues for those looking to enter the market. It’s an opportunity to reassess financial positions and explore the possibilities that this change could bring.
We’d love to hear your thoughts on this development. Have you or someone you know been affected by HELP debt when applying for a home loan? Do you think this change will make a significant difference in the housing market? Share your experiences and insights with the YourLifeChoices community in the comments below.
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