What you need to know about changes to your borrowing power

By John Fisher - June 19, 2019

Interest rates are at record lows, but your bank still won’t approve your loan. Why? Because banks don’t assess loans on actual rates, they use ‘buffered’ rates to test your borrowing capacity.

Here’s an example to better illustrate this point. At the time of writing, ING have a 3.63% home loan product, however, when assessing your loan ING use an 8.00% interest rate to test your borrowing capacity. Yes, that’s more than double the rate! Similarly, Macquarie Bank have a home loan product at 3.69%, but assess your loan at an interest rate of 7.25%.

It may seem like a dramatic difference but it’s with good reason. Let’s delve a little deeper.

Rates are currently at the lowest levels ever seen in the Australian market with the average first home buyer generally taking out a 30-year loan. History tells us that over that period of time interest rates will likely go up. So it is with due care that lenders work to ensure that customers can reasonably absorb these rate increases, and still comfortably live their lives.

So, what’s changed?

On the 21st of May, 2019, finance industry regulator, Australian Prudential Regulation Authority (APRA), announced changes to the loan assessment requirements for authorised deposit-taking institutions (ADIs) – banks, building societies and credit unions.

This change saw APRA flag the removal of the requirements for ADIs to assess loans using the greater of either:

  1. A 7.00% serviceability rate. 
  2. A 2.00% buffer on the actual loan rate.

APRA introduced this rule in 2014 and believes it is no longer required. They expect ADIs to self-regulate. This means that banks will now enforce their own minimum servicing hurdles.

Taking the examples above, Macquarie Bank and ING have both gone well above the minimum requirements enforced by industry regulator APRA. The average across banks, or ADIs, is currently 7.25%. It’s important to note that ‘non-banks’, such as Pepper, have a lower ‘buffered’ interest rate to assess your loan, as they are not classified as an ADI.

Even if ‘buffered’ rates are only slightly reduced, this means many Australians who may previously have been declined by their bank – for not meeting the service requirements of a loan – may now be eligible.

We are still waiting to fully see how this APRA announcement plays out in the market. But with falling interest rates and changes to your borrowing power, now is an ideal time to review your loans.

Please get in touch if you’d like to know more.


Copyright © 2019. The information provided is not personal advice. It does not take into account the investment objectives, financial situations or needs of any particular investor and should not be relied upon as advice. While the information is provided in good faith and believed to be accurate and reliable at the date of preparation, we will not be held liable for any losses arising from reliance thereon. We recommend investors consult their personal financial adviser to discuss suitability and application to their individual circumstances. Advisors at Pitcher Partners Sydney Wealth Management are authorised representatives of Pitcher Partners Sydney Wealth Management Pty Ltd, AFS & Credit Licence number 336950.

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