Some great news for those seeking to obtain finance this week. Independent financial regulator APRA has recommended to the banks that they ease their assessment rates in order to help the contracted lending market.
This is very good news for everyone who has a home loan and it is without a doubt going to help first home buyers get into the property market. I am very happy to hear of this policy, especially after the ongoing restrictions over the past few years.
What is an assessment rate?
Firstly you might be asking yourself, what exactly is an assessment rate?
This is the rate that the bank stress tests your loan. It is important to have an assessment rate, but in my honest opinion, I do believe that they sit too high for today’s current lending environment. Where in some cases, your assessment rate is more than double the actual rate!
Prior to 2014, the assessment rate was approximately 1.5% above your home loan. So, if your rate was 4%, it would be assessed at 5.5%.
APRA enforced that the minimum rate for a loan to be assessed would be 7% … in fact most banks adopted at least 7.25%. This resulted in borrowing capacities being dropped by over $100,000 in many cases. This was the start of the tightening of credit and was designed to reduce the property boom (which didn’t work due to a surge of foreign investment cash buyers …. but that’s another story for another blog post!)
What has now been proposed by APRA is that we adopt the previous model, where we add a buffer to the rate – the recommendation is set to be 2.5% above the home loan rate.
What does this mean?
Let’s take the Bank of Sydney as an example. They are one of our smaller lenders that we like to use here at Pink Finance. They currently have a home loan rate of 3.55%* (comparison rate 3.57%). Currently, the bank assesses this at 7.30%. – a whopping 3.75% above the actual home loan rate. If they adopted APRA’s proposal, this assessment rate would drop down to 6.05%.
How does this impact borrowing capacity?
I recently assessed a First Home Buyers Borrowing Capacity. They are vigorously saving and have a household income of $110,000. Their borrowing capacity is currently $559,000. For this example, the reduction of the assessment rate could increase their borrowing power to $628,000.
For a first home buyer who had $100,000 in savings, this would mean your purchase price could increase from $655,000 to $712,000.
This is awesome news for those wanting to purchase a property or increase their borrowings for renovations. However, it is equally beneficial for those who may have been wanting to refinance their home loan and consolidate debts. This has been much harder to do over the last year or so, but this new policy being introduced by APRA, will assist those to refinance and reduce the likelihood of their refinance loan being knocked back.
Now it is a matter of when the banks will introduce this policy? Personally, I don’t think it will be too long…
Good news overall for the housing industry and the Australian public!
*Rates are subject to change and was correct as at Wednesday 22nd May.