On the 5th July 2019, APRA wrote to all Authorised Deposit-Taking Institutions (ADIs) notifying them that it no longer expects them to use a benchmark rate of 7.25% when stress testing a borrower’s ability to borrow money. Instead, APRA expects ADIs to use a buffer of at least 2.5% above the actual interest rate. Since APRAs letter, all of the four major banks (and some non-major lenders) have revised their credit policies which will have a positive impact towards your borrowing capacity.
Prior to APRAs announcement, banks and lenders were required to apply a minimum floor rate of 7.25% when assessing your borrowing capacity. The reason behind a servicing rate (also known as the qualifying rate) is to factor in possible future rate rises, as well as to stress test a borrower’s ability to ride the ups and downs that comes with debt.
APRA has been vocal about the fact that a servicing rate of 7.25% had a purpose (and it served that purpose), however a servicing rate of 7.25% has become outdated as a result of prevailing low interest rates, as well as the introduction of differential pricing for mortgage products.
APRAs removal of the 7.25% minimum servicing rate is a positive step for mortgage borrowers, and I believe is a very positive step for our property markets. Apart from the obvious, which is home buyers will be able to pay more for property and/or buy more property, the change announced by APRA will have a profound influence on sentiment. Sentiment is a key driver for our property markets as human emotion plays a key role.
Does this recent change mean my borrowing capacity is the same across all banks and lenders?
The simple answer is no.
Whilst the servicing floor rate of 7.25% has been removed, each bank and lender is still playing their own game and will set credit policy to suit their individual risk appetite.
APRA has requested that each ADI apply a minimum sensitivity buffer of 2.5% above the actual interest rate, however each lender will (and has) set their own floor rate to ensure they still lend responsibly within their own risk appetite.
Here’s what’s been announced by each of the four major banks over the past week – since APRA issued their guidance letter
- ANZ servicing floor rate of 5.50%
- NAB servicing floor rate of 5.50%
- CBA servicing floor rate of 5.75%
- WBC servicing floor rate of 5.75%
What this means is that each lender will assess your borrowing capacity on the basis of their individual servicing floor rate (as noted above), or the actual interest rate plus 2.5% – whichever is higher.
To illustrate, let’s say you can source a home loan rate of 3.3% from ANZ, the bank will assess your capacity to repay on 5.8% (i.e. 3.3% + 2.5% buffer = 5.8%) – as 5.8% is higher than the floor rate of 5.5% as set by ANZ.
Some other lenders have also revised their servicing rates (such as Macquarie and Adelaide Bank), however the majority of ADIs are yet to announce their revised credit policies (at time of writing this blog).
How much more can I borrow in light of these changes?
It depends – your situation is unique to you.
I ran the numbers for some clients we recently assisted and on average their borrowing capacity was between 10% and 20% higher when compared to using the previous servicing floor rate. There are many variables which impact on your borrowing capacity, and this will vary from person to person.
There is still a big focus on living expenses with all lenders, and whilst the servicing rate has been reduced (as explained above), your lifestyle has a bigger impact on your borrowing capacity that what you think. For example, if your kids go to private school, then your living expenses will be significantly higher than the family who’s kids go to state school. Or if you dine out most days during the week, then again your living expenses will be significantly higher than someone who only eats out once a week.
Your discretionary expenses can put a dent in your borrowing capacity as this impacts on your disposable household income.
Some time ago I wrote a blog on how your borrowing capacity is calculated, and the key impacts on your borrowing power. If you’re currently wanting to borrow money, or borrow more money, I recommend you have a read (as a reminder) to ensure you give yourself the very best chance of being approved first time.
In summary, this recent announcement by APRA is a very positive step for home loan borrowers, which will inevitably also have a positive impact on our property markets.
Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in this blog. It contains general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.