The Australian Prudential Regulation Authority (APRA) has announced changes to how banks and lenders assess home loan applications.
The changes specifically relate to the way lenders assess how much you can borrow for your home loan. The changes mean more people could access home loans, and your borrowing power could very likely to increase. This is great news for borrowers.
Let’s take a look at what the changes are, why APRA has decided to make them and most importantly, what the changes could mean for you.
How were home loan applications assessed before the changes announced by APRA?
When you apply for a home loan, the bank or lender you want to borrow the money from assesses whether or not you’ll be able to meet the loan repayments.
The bank/lender puts your loan application through several tests as part of their assessment.
When they test your ability to afford the loan repayments, they test it at a higher interest rate than the loan’s actual interest rate.
Meet Amanda and Dan. They’re applying for a home loan with a 3.75% interest rate.
- When the lender tests their ability to repay the loan, they don’t actually calculate the repayments at the 3.75% interest rate
- They test it at a higher interest rate
- This creates a buffer to ensure that if interest rates rise, Amanda and Dan will still be able to make their loan repayments
APRA’s serviceability guidance requires banks and lenders to test your ability to make your loan repayments using an assessment rate. Previously, that assessment rates were:
- at least a 2% buffer on top of the loan’s actual interest rate or,
- a 7% interest rate (interest rate floor)
The bank/lender had to test the repayments against whichever was highest out of the two options (2% buffer or 7% interest rate floor).
Most banks/lenders actually used a 7.25 % interest rate floor and a 2.25% buffer.
So, if we go back to Amanda and Dan’s home loan application:
They’re applying for a home loan with an interest rate of 3.75%.
Previously, when the bank/lender assessed their ability to repay the loan, they tested it against at least a 7% interest rate.
APRA supervises institutions across banking, insurances and superannuation.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”
APRA Chair Wayne Byres
What do changes mean for you?
The changes will likely increase your borrowing potential and give more people access to home loans.
Lowering the interest rate floor by even 1% could take off approximately $60 per week of the assessed repayment on a $400,000, 30-year loan.
Let’s see how the changes would affect Amanda and Dan’s home loan application:
- Amanda and Dan have a household income of $109,688
- They would be able to borrow up to $60,000 more if their loan was assessed at 6.25% instead of 7.25%
These changes don’t mean there will be a borrowing ‘free-for-all’. Responsible lending still applies, and other elements of the loan assessment have tightened.
What happens next?
APRA advised the new guidance was to take effect immediately upon its announcement (on July 5). However, it will take some time for banks and lenders to implement these changes.
ANZ was the first lender to announce changes based on the new guidance. Effective 15 July 2019, ANZ will amend their interest rate floor and sensitivity margin (buffer) used for retail lending.
The floor rate will change from 7.25% to 5.50%, and the sensitivity margin will change from 2.25% to 2.50%.
Since then, many lenders have followed suit and changed their assessment rates. However, not all lenders have made changes yet. Also, the changes to interest floors are not uniform across the lenders. Some lenders have chosen to keep their assessment rates quite high, while others have lowered their significantly.
If you’d like to find out how your borrowing power has changed book a chat with me and I’d be happy to help you.
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