What APRA’s assessment rate change means for you
It’s been very hard for borrowers to get finance approval in the last 12 months, for a number of reasons.
First, there were moves made by APRA (the Australian Prudential Regulation Authority) to force banks to trim their investor loan book; this saw lenders tighten their loan criteria for would-be landlords.
Then along came the Royal Commission, which pushed lenders into an even more conservative position when assessing loans.
Add a slowing property market, sluggish wage growth and a soft economy to the mix, and we were staring down the barrel of a finance crisis.
Until a couple of weeks ago, that is.
The federal election last month restored some stability to the finance and property industry, as it meant current tax policies related to real estate would remain in play. Immediately following the election, APRA announced another game-changer: they would look to change loan assessment rates.
So what does this mean, and how does it affect you?
Assessment rates and your loan
Currently, under guidance from APRA, banks and lenders assess every borrower’s loan application as if they are going to be paying an interest rate of at least 7%. Current interest rates are around 3.5-4% – so at 7%, the assessment rate is almost double the reality of what mortgage holders are paying.
This assessment rate has been in place as a “risk mitigation” tool for lenders, as they (rightly) want to be assured that as a borrower, you will be able to continue paying your loan, even if interest rates creep up.
Many have argued for this rate to be amended, as making calculations for residential mortgages based at 7% means borrowers are able to access far less funding. This is all set to change, however, as APRA has announced that they will allow banks to assess loans at 2.5% above current rates.
In other words: the assessment rate will drop from approximately 7-7.25%, down to around 5.75-6%. This will open the door to many more buyers to enter the property market, and it will increase the property budget for those who had previously been approved for lower amounts.
In practical terms, this move away from high serviceability calculations could see borrowers access up to 10-20% more in borrowing.
It’s not a done deal yet, as APRA says they will undertake a short consultation period, closing on 18 June 2019, before releasing updated guidelines for deposit-taking institutions.
However, if passed, borrowers will qualify for tens of thousands (if not hundreds of thousands) of dollars in additional lending. This could see competition and demand ramp up, so if you’re considering buying a home or investment property, this could be the time to take action.
The bottom line is that you should be able to borrow more now than you were able to access even last month, so if you’d like us to crunch the numbers for you, contact us today!