One of the most crucial aspects when applying for a loan is the serviceability assessment. A lender will assess your income versus expenses to determine that you can afford the proposed loan repayment. It sounds like a simple process but is quite complex.
Income is scrutinised with regards to its consistency post settlement. Each lender has slightly different policies. Generally, the more inconsistent an income the greater the scrutiny. For example, bonus income is usually averaged over 2 years and reduced by 20%. Likewise, expenses are assessed in a very conservative approach. For example, credit card repayments are calculated using the card limit at 3.8% (previously 3%). The proposed loan repayment will be calculated using an assessment rate.
The assessment rate is the interest rate used to calculate proposed loan repayments. The Australian Prudential Regulatory Authority ((APRA) - the banking regulator) recently reviewed their guidance regarding the assessment rate. Since December 2014 most lenders used a floor rate of 7.25% or a buffer of 2.25% (added to the actual rate). The highest of these two rates were used as the assessment rate. Given the low rate environment and the expectations this will continue for some time it was deemed unnecessarily high.
APRA has now allowed lenders to set their own floor rate with an increased buffer of 2.5%. Most lenders have implemented a floor rate between 5.3%-5.75%. As before, the higher of the two is used as the assessment rate. Below is an example of two loans with slightly different interest rates illustrating the assessment rate utilised.
In either example, you can see the assessment rate used is much lower than the previous 7.25% floor rate. This has a big impact to borrowing power.
This change effects all customers but most notably to First Home Buyers (FHB) and Investors. in one example a FHB client increased their borrowing power by $68K. This allowed them to consider a house instead of a unit. Assessment rates are not only applied to new lending but existing as well. Investors with multiple loans see a large increase in borrowing power. For example, one of our investor clients had an increase of $80K. This allowed the client to refinance their portfolio to a much lower interest rate.
Now is a great time to re-assess your borrowing power and loan options. It could change your investment strategy or provide the ability to now refinance to a better deal and/or open up additional loan options to consider.
Income is scrutinised with regards to its consistency post settlement. Each lender has slightly different policies. Generally, the more inconsistent an income the greater the scrutiny. For example, bonus income is usually averaged over 2 years and reduced by 20%. Likewise, expenses are assessed in a very conservative approach. For example, credit card repayments are calculated using the card limit at 3.8% (previously 3%). The proposed loan repayment will be calculated using an assessment rate.
The assessment rate is the interest rate used to calculate proposed loan repayments. The Australian Prudential Regulatory Authority ((APRA) - the banking regulator) recently reviewed their guidance regarding the assessment rate. Since December 2014 most lenders used a floor rate of 7.25% or a buffer of 2.25% (added to the actual rate). The highest of these two rates were used as the assessment rate. Given the low rate environment and the expectations this will continue for some time it was deemed unnecessarily high.
APRA has now allowed lenders to set their own floor rate with an increased buffer of 2.5%. Most lenders have implemented a floor rate between 5.3%-5.75%. As before, the higher of the two is used as the assessment rate. Below is an example of two loans with slightly different interest rates illustrating the assessment rate utilised.
|
|
Example 1 |
Example 2 |
|
Rate to Borrower (Actual Rate) |
3.05% |
4.15% |
|
2.5% plus Rate to Borrower (Buffer) |
5.55% |
6.65% |
|
Floor Rate (Lender elected) |
5.75% |
5.75% |
|
Assessment Rate (highest of the two) |
5.75% |
6.65% |
In either example, you can see the assessment rate used is much lower than the previous 7.25% floor rate. This has a big impact to borrowing power.
This change effects all customers but most notably to First Home Buyers (FHB) and Investors. in one example a FHB client increased their borrowing power by $68K. This allowed them to consider a house instead of a unit. Assessment rates are not only applied to new lending but existing as well. Investors with multiple loans see a large increase in borrowing power. For example, one of our investor clients had an increase of $80K. This allowed the client to refinance their portfolio to a much lower interest rate.
Now is a great time to re-assess your borrowing power and loan options. It could change your investment strategy or provide the ability to now refinance to a better deal and/or open up additional loan options to consider.
