Earlier this month, the Australian Prudential Regulation Authority (APRA) finalised its revised guidance on serviceability assessment rates for lenders in relation to loan applications. Previously, APRA required all lenders to calculate a borrower’s capacity to repay a loan using a mandatory minimum interest rate of 7% per annum. Common industry practice for lenders was to use 7.25% per annum. APRA acknowledged that in the prevailing low interest environment, a serviceability rate of 7% was higher than necessary for lenders to maintain sound lending practices.
As a result, lenders can now assess loan affordability based on the actual interest rate the lender will charge a borrower plus a buffer of 2.5%. With interest rates currently between 3.5% to 4%, this is a significant reduction in the rate used by lenders to assess the affordability of a loan for a borrower. Each lender is required to assess their own risk appetite having regard to their portfolio mix when setting their own serviceability rate. Several lenders have revised their serviceability rate in line with these new benchmarks.
APRA is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.
What is ‘serviceability’?
‘Serviceability’ refers to the ability of a borrower to meet loan repayments having regard to the size of the loan, interest rate and terms and the borrower’s income and expenses (including obligations to make repayments on other debt).
APRA introduced a mandatory serviceability rate of 7% in December 2014 to reinforce sound residential mortgage lending practices to address emerging pressures in the housing market. However, despite repeated rate reductions from the Reserve Bank of Australia (RBA) intended to kickstart a stagnant housing market, restrictive lending policies have made it difficult for property buyers to obtain finance. With the reduction in the serviceability rate now more consistent with the current market interest rates on offer, it is expected that more borrowers will finally be able to afford to buy a property or refinance their existing property.
How does this affect your borrowing capacity? (example scenario)
Prior to these amendments, a couple with no debt, $3,000/month living expenses and $100k combined income previously had a borrowing capacity of approximately $560,000, using a serviceability rate of 7% pa*.
Using the new serviceability criteria set by APRA, the same couple may now qualify for a loan of approximately $640,000, with no change to their current financial circumstances*.
If you are considering a property purchase or refinance in the near future, it’s a great idea to understand how the new serviceability guidelines may affect you. If you’d like to have a look at what opportunities may now be available to you as a result of the new serviceability rates, contact your broker today on (08) 9367 4222, [email protected] or fill out the form on this page.
* Calculations are based on loan amounts of $560,000 and $640,000 and a 4% pa interest rate over a 30-year loan term. Other fees and charges that may be applicable to your loan product have not been considered. These calculations are subject to individual lender policy. This calculation is for illustrative purposes only and should not be considered professional advice.