Our friends at APRA recently announced they are making changes to serviceability assessments that banks must follow on residential home loan applications. Link here.
So what’s a Serviceability Assessment?
In short, it’s basically how the banks will stress test any potential or existing loan repayment to ensure that you won’t be in financial hardship if rates increase or your cost of living increases.
It was initially introduced in 2014, and at the time, a minimum assessment rate of 7.00% was enforced on banks. Even though rates went down and are now in the 3%’s, banks were still required to assess as if they were 7.00% (but most were using 7.25%).
In the new world, banks can now complete the assessment using an actual rate + 2.5. They’ll also set their minimum assessment rate. Lenders are not obligated to make a move, but we have started to see some make the change over the past week, with most expected to follow suit quickly. To give you an idea of the impact it has on a loan assessment:
In this scenario, ‘stress tested’ repayments are $413.00 lower on a loan of $500,000.00.
What does this mean for you?
Well, it’s good news for people looking to buy a place, especially if you’re looking for a place to live in. Borrowing power should increase by a decent amount for people with owner-occupied loans, which will impact but not be as significant for investors.
With great power comes great responsibility. There is a potential trap here. People, by default, are terrible at estimating their expenses (we’ll give you the benefit of the doubt, but let’s be honest). There is an even greater chance you’ll bite off more than you can chew with loan repayment.
If you’ve sleuthed our website, you’ll know our core mission is not just to help you get an affordable loan but then pay it off as quickly as possible. Unless you crunch your numbers and are 100% confident that you’ll be ok with the repayments, you’ll need to be more careful than before that you’re not over-committing.
Will my repayments go down?
The changes will not impact existing loans, the actual repayments, or how a bank would assess your ability to repay a loan.
None of this makes any sense. You need to improve at communicating.
I know, I’m like that sometimes. If I’ve done a lousy job explaining and you have questions about how this will impact you personally, feel free to contact me via our contact form. We’ll talk it out.