The recent move by APRA to scrap the 7 per cent serviceability buffer on home loans is great news for borrowers and those looking to buy into the property market.
Bowing to industry pressure, the Australian Prudential Regulation Authority has confirmed that residential mortgage lenders will no longer be expected to assess home loan applications using a minimum interest rate of at least 7 per cent. Most lenders currently set their rate at 7.25 per cent or higher. These rates were put in place in December 2014 when the cash rate was 1.5 per cent above where it now sits, making its comparison to “real world” repayments out of line with current market settings.
APRA’s changes mean banks will be able to review and set their own minimum interest rate floor for use in serviceability assessments and adopt a revised interest rate buffer of at least 2.5 per cent above the actual rates on the application.
The raw numbers of the changes mean a reduction in the assessment rate of up to 1.5 per cent. While this will not make your home loan cheaper (the last two RBA interest rate cuts have already achieved that), it improves your ability to gain credit from the bank as you now need less income to show the bank you can afford to service your loan.
On a $1 million home loan facility, assessed repayments have dropped by almost $1000 a month, meaning applicants now need $12,000 less in net income a year to gain an approval. This is especially good news for those who have become “trapped” in a mortgage after assessment criteria were changed during the past five years, increasing assessed living expenses. These customers will now have the opportunity to change lenders to receive a more cost-effective product.
With many banks yet to make a final decision on how they will act on APRA’s changes, you can expects to see some competition in the marketplace among banks to have the “best” assessment rate for new borrowers.
Additionally, the changes spell good news for the property market outlook in general. With the banks adopting a more relaxed approach to lending and more people able to borrow, or afford to use the equity they already have, the scene is set for demand to increase, boosting prices and potential capital gains prospects.
The time is right for existing borrowers to refinance and those in the market for a new home to make a purchase. Add record low interest rates and falling assessment rates to the mix and your borrowing power has never been higher.
For those sitting on property waiting for the market to improve this could provide the kick you have been waiting for.