The critical constraint on borrowing limits that were implemented in late 2014 has been removed by APRA (Australian Prudential Regulation Authority). It is another move that may encourage the idleness of the property market.
To make it more specific, APRA has removed its quantitative guidance on the level of the serviceability floor rate at 7%, which ADIs (Authorized Deposit-taking Institutions) or banks use to assess home loan applications.
This would be an advantage for borrowers as their chances of getting approved for a home loan is increased.
Before, when the borrowing limit is still in effect, a borrower aiming for a mortgage with an interest rate of 3.9% would be calculated to repay the mortgage at a floor assessment rate of 7.25%. But with the changes, the borrower would be calculated using a floor assessment rate of 6.00%.
The interest rate changes made by the APRA seems reasonable since it is expected to be this low for a longer period.
Before, an annual gross income of $90,000 by a home buyer can borrow up to $557,920 with a $7.25% assessment rate from the bank. At present, the changes could allow the same home buyer to borrow up to $634,808 with an assessment rate of $6.00% by the bank. An approximately 14% increase in borrowing power would be of great impact for a home buyer.
An annual gross income of $90,000 can borrow up to $557,920 with a $7.25% assessment rate from the bank. At present, the changes could allow the same investor to borrow up to $634,808 with an assessment rate of $6.00% by the bank. An approximately 14% increase in borrowing power would be of great impact for an investor.
APRA might have made changes to increase the borrowing capacity or ease the burden of the borrowers, but this doesn’t mean that the process would be a lot easier also. A borrower will still undergo a number of checks and balances in order to make sure that they can afford to repay the home loan they are applying for.
There are no more limitations set by the Government on how much a bank could lend to their borrowers. It will now depend on the banks on how much is their willingness to take risks.
ING: One of the highest assessment rate of 8%. As they are known to be very strict with their service, it is a doubt that they would implement a significant change.
CBA: A drop of 5.75% in their floor assessment rate, as they believe that the rates will gradually increase in the long run. The affordability of their rate to their borrowers is what they are focusing on now.
Other Lenders: They have dropped their floor assessment rate to $5.30.
*Some other lenders have not yet announced their changes.
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