APRA has just made it easier to get a home loan
Lenders can now test your ability to make repayments by adding 2.50% to your loan's interest rate.
The Australian Prudential Regulation Authority (APRA) has altered serviceability assessment guidelines for mortgage lenders, making them lower and more flexible.
Based on your income, spending and borrowing amount, the serviceability assessment makes sure that a borrower can afford repayments even if interest rates rise. Before the changes, which came into effect on Friday, APRA expected lenders to apply a hypothetical interest rate test of at least 7% when assessing a mortgage application.
The new test recommends lenders add 2.50% to the interest rate on the mortgage you're applying for. This will likely result in a lower benchmark for most borrowers than the 7% test.
In the current lending environment, a 7% interest rate is "higher than necessary", according to APRA chair Wayne Byers.
The Reserve Bank of Australia has cut the cash rate two months in a row, prompting a wave of rate cuts from lenders. Variable and fixed rate mortgages with rates below 3.40% are becoming commonplace.
Let's say you applied for a loan with an interest rate of 3.49%. Based on the new guidelines, your lender will add 2.50% to get a hypothetical rate of 5.99%. If you can comfortably make repayments at 5.99%, you're good.
This difference can be quite significant. Let's look at monthly repayments on an average loan with 5.99 and 7.00%.
New test
- Loan amount: $400,000
- Term: 30 years
- Rate: 5.99%
- Monthly repayment = $2,395
Old test
- Loan amount: $400,000
- Term: 30 years
- Rate: 7.00%
- Monthly repayment = $2,661
That's a $266 difference and undoubtedly makes it easier for borrowers to get approved for a mortgage. Lenders have made it harder to qualify for a mortgage in the wake of the royal commission into financial services.
But Byers stressed that there were "many risk factors remaining in place, such as high household debt, and subdued income growth". While freer to set their own serviceability floors, he added that lenders should maintain "a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments".
