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Changes to Lending Assessment Rates and How it Affects You

Assessment Rates

You may think it’s pretty easy to work out what you can afford to borrow. After all, there seem to be plenty of online calculators available where you plug in your details and voila, out spits a figure that a faceless lender will theoretically lend you. We’re here to tell you there’s a little more to it than than.

Sure you may have worked out what repayments you’re up for, and decided it’s within the budget, but in terms of officially qualifying for a loan with a specific lender, a bit more analysis is required.

Because by the time a lender adds in their buffers and applies lending policies to your financial situation, it can be quite a different story.

To find out more about loan serviceability and how a lender determines whether you can service the loan you’re applying for, you can find more details here.

What we want to talk about here though, is one small (but critical) element of these serviceability calculations – the ‘assessment rate,’ because there have been some recent changes to this rate you may not be aware of.

 

What is the Assessment Rate?

The assessment rate is the rate that lenders use to determine whether you can meet repayments of the loan you are applying for – but it’s not the same as the lending rate.

It doesn’t matter if you’ve secured a  good rate and can easily meet the associated repayments. What matters is whether you can qualify for the loan on paper at the assessment rate, which is higher than the actual lending rate.

 

How much higher is the Assessment Rate than the lending rate?

In Dec 2014, APRA issued guidance to lenders proposing they use an assessment rate (also called a ‘floor rate’) of at least 7%p.a in servicing calculations. Each lender implemented this in accordance with their own risk profile and many lenders used a rate higher than the 7%p.a.

APRA issued this minimum assessment rate to curb soaring house prices and slow investment loan growth. In addition, it was to protect home owners from being caught with loans they couldn’t manage, if interest rates increased.

But since interest rates have remained low – and they’re expected to remain low for longer – the difference between actual lending rates and the assessment “floor rate” has become substantial, “possibly unnecessarily so,” said APRA Chair Wayne Byrnes.

We’ve also seen other regulatory measures introduced in recent years (here’s a recap) that have seen banks introduce different pricing for different loans.

In light of this, APRA reviewed the appropriateness of a single assessment rate earlier this year and came to the conclusion that given rates already differ for owner occupiers with principle and interest loans and investors with interest only loans, it no longer seems appropriate to have all borrowers qualify at the same assessment rate.

 

How have APRA changed the Assessment Rate?

APRA has proposed that lenders can use an interest rate buffer of 2.5% above the loan’s actual interest rate when performing serviceability calculations.

Similarly to before though, it’s at the discretion of an individual lender to implement APRA’s advice in a way that’s consistent with their assessment policies.

For example, at least one lender has decided the assessment rate to be used will be the higher of:

a) the rate on the loan product selected plus a buffer of 2.5% (for example – 3.45% + 2.5% = 5.9%)

b) the current fixed rate loan on a specific fixed rate period; or

c) a specific rate which can be changed at their discretion.

 

So, instead of qualifying for a loan at the previous assessment rate of 7%p.a, based on the above, your capacity to service a loan may now be based on a lower assessment rate of 5.9%p.a.

**Please note these rates are given as an example only**

With all else being equal, a reduction to assessment rates arguably means you would qualify for a higher loan amount than you did six months ago…. but things are not always as they appear…

 

What no-one is telling you though…

Something we want to make really clear here is that changes to rates do not necessarily make it easier for you to borrow money – something that most articles summarising the change to assessment rates conveniently overlook.

The reason for this is that when lenders changed their assessment rates, many took the opportunity to completely overhaul their servicing calculators to incorporate other changes to their lending policies.

So whilst in isolation a lower assessment rate may have favourably impacted borrowing capacity, due to changes in the way other aspects of servicing are assessed (monthly living expenses, repayments on existing debts, negative gearing benefits, minimum notional rent amounts for example), it may not work out that way for you.

It very much depends on your personal situation and which lender you’re looking at.

 

Regardless of your current servicing position, a lender will still require you to submit all your supporting documents.

A lender will still review those documents with a fine-tooth comb.

And a lender will still look to us as mortgage brokers advocating on your behalf, to put forth a strong case that you are a suitable candidate to lend money to.

The assessment rate is just one part of the servicing calculations. And servicing is just one element of getting your loan application approved.

 

If you’re keen to get an idea of how much you could borrow to purchase your next home, you can get started here.

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