Our friends over at APRA recently announced they are making changes to serviceability assessments that banks are required to 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 if rates go up or your cost of living increases that you won’t be put in financial hardship.
It was originally 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 are now able to complete the assessment using an actual rate + 2.5. They’ll also set their own minimum assessment rate. Lenders are not obligated to make the 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 actually mean for you?
Well it’s good news for people looking to buy a place, especially if you’re looking a place to live in. Borrowing power should increase by a decent amount for people with owner occupied loans, and it 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 own expenses (we’ll give you the benefit of the doubt, but let’s be honest). There is now an even greater chance you’ll bite off more than you can chew with a loan repayment.
If you’ve sleuthed our website, you’ll know our core mission is not just helping you get an affordable loan, but then pay it off as quick 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 have no impact on existing loans, nor the actual repayments, just on how a bank would assess your ability to repay a loan.
None of this makes any sense. You’re terrible at communicating.
I know, I’m like that sometimes. So if I’ve done a bad job at explaining and you had questions around how this will impact you personally, feel free to hit me up via our contact form. We’ll talk it out.