This month APRA (Australian Prudential Regulation Authority) has removed rules for the banks about how they calculate borrowing power. As a result, borrowing power has increased by as much as 15 per cent.
Who are the winners?
- Home buyers have seen their borrowing power increase by approx 15%.
- Investors can now borrow 15% to 30% more.
- Mortgage prisoners who are people unable to refinance due to lending restrictions are now far more likely to be able to refinance.
Refinancing is now easier and there are more lenders who can help. Please call us on 1300 889 743 or enquire online if you’d like to compare your options.
How much more can I borrow?
A home buyer
A single borrower with an annual gross income of $90,000 with no other ongoing liability and low living expenses used to be able to borrow up to $557,920 when the banks used an assessment rate of 7.25%.
Now, the same borrower may have an assessment rate of 6.00%, which allows them to borrow up to $634,808.
That’s an increase of roughly 14% in their borrowing power.
An investor with the same income of $90,000 p.a. and an existing owner-occupier mortgage balance of $300,000, looking to purchase an investment property could borrow up to $695,861 based on an assessment rate of 7.25%.
Now, the same investor assessed at 6% would be able to borrow up to $791,751 or $95,898 more than he could before.
The calculations are based on a proposed rental income of 4% p.a. on a $400,000 property and an existing owner-occupied home loan balance of $300,000 at 3.7% p.a. with 25 years remaining.
Everyone is different
The borrowing power calculation will be different for everyone as it’s a complex calculation. Most borrowers will see their borrowing power increase significantly and those who have several mortgages, most likely investors, will see the biggest increase in their borrowing power.
Which banks have the best borrowing power?
The government is no longer limiting how much the banks can lend however the banks themselves each have a different risk appetite.
- Some lenders like ING are very strict with serviceability, their assessment rate of 8% is one of the highest and is unlikely to change by much.
- While other lenders like CBA believe rates may rise in the long term and want to make sure that customers can afford this, so have dropped their floor assessment rate to a mid-range 5.75%.
- Some of our lenders have dropped their assessment rate to as low as 5.30%.
- We’re still waiting on all of our lenders to announce their changes.
With the combination of the two recent cash rate cuts and the new assessment rate, more people are likely to qualify for a refinance and this is expected to create strong competition and competing promotions by lenders in the second half of this year.
So, the coming months will likely see good additional savings for all clients who are actively looking to review their home loans.
We can work out which lender will allow you to borrow the amount that you need. Please call us on 1300 889 743 or complete our enquiry form and one of our mortgage brokers will assess your situation in full.
How does the government control how much I can borrow?
In a letter, following its consultation with industry stakeholders, APRA announced the following changes effective 5 July 2019:
- Banks are now able to review and set their own minimum interest rate floor however, they must maintain an interest rate buffer of at least 2.5% over the loan’s interest rate.
- Banks (ADIs) will now no longer have to assess home loan applications using a base assessment rate of at least 7%. Most lenders previously used 7.25% p.a. but a slew of lenders are announcing their new floor rate.
How do banks calculate your assessment rate?
Banks use your actual interest rate plus a buffer or their floor interest rate, whichever is higher.
For example, they may have a floor interest rate of 5.75% and your actual rate maybe 3%, and their buffer maybe 2.5%.
In this case, your actual rate plus the buffer is 5.5% and their floor rate is 5.75% so they’ll assess your home loan as if the interest rate is 5.75%. By doing this, they can be sure that you can comfortably afford your mortgage if interest rates increase.
How do they then calculate how much you can borrow? That’s much more complicated, please refer to our page on calculating your borrowing power.
How does this affect loans on a fixed rate?
For home loans on a fixed rate, the assessment rate will be based on what rate the loan will revert to after the fixed rate term ends.
So for example, if your fixed loan reverts to 4.5% after the fixed term ends, then your assessment rate will be 4.5% plus 2.5% (buffer rate) which is 7.00% p.a or the minimum floor rate whichever is higher.
How we can help?
Many people who couldn’t refinance before will no longer be mortgage prisoners.
There’s every reason for both new and existing borrowers to take advantage of record low interest rates and relaxing borrowing power guidelines.
To revisit your borrowing power, speak with one of our specialist mortgage brokers today by giving us a call on 1300 889 743 or by filling in our online assessment form.