Changes to affordability assessment may mean getting a home loan just became a little easier……
At the start of July, the Reserve Bank of Australia (RBA) announced a further cut to the official cash rate, reducing it to an all-time low of 1%. This change saw most lenders pass on either a partial or full reduction in interest rates to their variable rate customers as well as the release of some of the lowest rates ever offered to new borrowers.
In more good news, at the end of July the big four banks along with most other lenders relaxed their lending restrictions regarding the rate they use to calculate affordability or ‘serviceability’ referred to as the assessment ‘floor rate’. This change will have a far greater benefit for potential borrowers than any further rate reductions by the RBA, as it will increase their maximum borrowing power.
Previously, the Australian Prudential Regulation Authority (APRA) required the floor rate to be at least 7% to ensure borrowers were protected against future increases in interest rates and lenders generally used a more cautious rate of 7.25%. In the current market offering record-low interest rates it often resulted in affordability was being assessed at more than double the actual repayment amounts! The outcome was, of course, a significant hit to the maximum amount customers have been able to borrow.
APRA has relaxed the requirement to allow lenders to set their own floor rates and use the higher of either their floor rate or the advertised rate with a buffer of 2.5% to assess affordability. The new applicable rate varies by lender and product but for home owners it now sits roughly at 6%. To find out more about how this works check out our article on assessment floor rates.
For the majority of our customers, we have found that borrowing capacities have increased by up to 15% for home owners and potentially even more for investors, particularly if they have multiple loans. To demonstrate the impact of this change, let’s look at a typical household to see how this might make their home loan application easier.
Example:
- married couple with 2 children
- combined household income of $125,000
- total credit card limit of $10,000, no other debts and low living expenses
- applying for a 30-year loan term to buy their first home
When assessed using a floor rate of 7.25% they could borrow a maximum of $623,299.
But when assessed using a floor rate of 6%, the maximum is $709,197. This equates to nearly a 14% increase in borrowing capacity!
For home buyers, this increase could mean the difference between buying their dream home or not. And for customers who have found themselves trapped in their current mortgages due to tighter lending restrictions, this change might allow them to finally refinance and save themselves thousands of dollars in interest payments.
Of course, everyone’s circumstances are different and there are many factors that lenders use to determine an applicant’s borrowing capacity. As different lenders are applying different floor rates your borrowing capacity will vary depending on who you approach.
A mortgage broker can give you guidance on your borrowing capacity just by asking a few simple questions. Why not contact us today to find out more?
Michael began his career in the finance industry over 35 years ago. He progressed through the ranks at the CBA in both retail and corporate lending, culminating in a senior position as a Corporate Relationship Executive. His decision to leave the bank in 2003 to become an independent mortgage broker was driven by his desire to assist everyday customers break through the jargon of the banking world and access the best loan products in the market. His experience is wide-ranging from helping first time buyers to large commercial enterprises. What Michael doesn’t know about home loans, simply isn’t worth knowing!