Is your Borrowing Capacity about to increase!!!!????
May 22, 2019
APRA- Australian Prudential Regulation Authority is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.
APRA’s newly announced proposal to allow banks to set their own serviceability floors when assessing residential home loan applications could enable more people to access mortgages / home loans.
When the banks assess a customer’s borrowing capacity on their calculators, they work off what’s called an “Assessment Rate” (also known as a floor rate, hurdle or buffer rate).
Some banks assessment rates are 7%, 7.25%, 7.5% and even 8%.
So that means in some cases the bank is working out a customer’s borrowing capacity at double the actual current interest rate!
The banks do this for two reasons:
1) To protect themselves and
2) Most importantly to protect the borrower- if the rates goes up say from 3.69% to 5% the bank has already assessed / calculated the borrower can afford the home loan repayments at say @ 7.25%.
So it’s a good thing as its responsible lending however on the flip side it’s a very conservative approach as the banks are working out a customer’s borrowing capacity at double the interest rate in some cases which means double the repayment.
This is why in the current environment a customer’s borrowing capacity is allot less than what they actually think it is.
So it looks like there is some great news around the corner with APRA writing to the big banks proposing to scrap this 7%+ assessment rate currently used.
We will have to wait and see if the banks adopt a lower assessment rate or buffer assessment.
If they do it will certainly make a large difference to a customer’s borrowing capacity.