Success Factors
Our analysis confirms borrowing capacity has increased by up to 15.78% for owner occupied loans and as much as 26.46% for investment loans.
Borrowing capacity has increased the most for Macquarie and ANZ in home lending due to their more generous updates to assessment rates. Macquarie and CBA are the strongest propositions for investment lending.
Max capacity has now diverged across the banks to reflect different risk appetite. It’s worth testing servicing with multiple banks if you are looking to achieve the maximum borrowing capacity.
Our house view is that this will only temporarily impact house prices. However it opens the door back up to clients who were on the cusp of refinancing but previously could not demonstrate servicing.
First off, what is an Assessment Rate?
An assessment rate is essentially a speed limit on your borrowing capacity.
Where in today’s market you may be paying a rate of 3.0-3.5% pa on your variable rate home loan, the rate the bank actually tests you on is more like 6.0%+.
This means while you could actually afford a $480,000 loan day to day on actual repayments, the bank may only lend to you $360,000 (for example).
Therefore banks use Assessments Rates as risk management tool to make sure you can continue to repay the loan if interest rates rise, you take out new lending after your home loan has settled, or a change in personal circumstances makes it more difficult to make repayments.
In July, APRA changed the rules
This was in response to the official cash rate falling to a historical low of 1% and bank assessment rates being so unrealistically high at 7.25%+ that even CEO’s were calling to loosen standards.
A consultation process was held and on 5 July APRA announced a relaxation of assessment rate standards effectively immediately.
Until then APRA expected banks to assess borrowers on a minimum 7% interest rate or an additional 200 bps above any existing lending they hold (whichever is higher). For safety, banks added another 25 bps points above APRA hurdles thereby standardising assessment rates across the board at 7.25%.
APRA now allows each bank to set their own floor rate for serviceability or add a second buffer of 250 basis points on any existing loans (again, whichever is higher). This is a GAME CHANGER for borrowing capacity as banks can now set their OWN assessment rate according to the risk they would like to take on.
There has been a lot of media interest about this which we wish to unpack:
- APRA bins buffer
- APRA scraps 7% home loan buffer
- Home loan borrowing capacity to be boosted as APRA scraps rule
How have banks applied this change?
Banks have now had the time to interpret and apply APRA’s policy guidance. But what is each bank’s interpretation and what does it mean for you as a borrower?
Being a mortgage broking firm that likes numbers, we wanted to test the numbers for ourselves rather than trust the media headlines.
Changes in serviceability floor rate
The first thing to note is that banks have each responded by adopting a different servicing floor, while universally adopting APRA’s guidance of a 250 bps buffer rate.
From these rates one can only assume that Macquarie, who is applying a new floor rate of 5.3%, is looking to use policy to aggressively increase market share, while CBA and WBC, being the nation’s largest home lenders, have been more conservative. NAB and ANZ who are more business focused lenders have come in down the middle with a ‘not too hot not too cold’ approach.
IMPORTANT! Actual Assessment & Reversionary Rate is Key
While these Assessment Rates look very attractive, in reality it’s very unlikely that the Serviceability Floor will be applied when assessing your borrowing capacity. This is because the rate the bank tests you on is the HIGHER OF the serviceability floor OR your current rate + the servicing buffer.
For example, a snapshot of owner occupied discounted rates across banks + the 2.5% buffer leads to an assessment rate of 5.82-5.99% between the major banks at the time of writing.
Interestingly, CBA and WBC have also linked a loan’s reversionary rate with the calculation of your Assessment Rate, further enhancing the difference between the Serviceability Floor and the actual rate applied. Reversionary rates are what a fixed or Interest Only updates to when that IO or fixed term expires. We don’t explore reversionary rates in detail in this article, but essentially adding 2.50% to a reversionary rate can take you above a 7.25% assessment rate thereby reducing borrowing capacity.
So… How does this impact my borrowing capacity?
We tested 2 scenarios…
To see how each bank’s assessment rates impact borrowing capacity, we tested 2 scenarios.
SCENARIO 1 – Owner Occupied Borrowing Capacity: Here we assume a couple earning $100,000 each. They have 2 dependents, Living Expenses of $4,500 per month and a Credit Card Limit of $20,000. They are looking to borrow for their first home on a P&I basis over 30 years.
SCENARIO 2 – Investment Borrowing Capacity: Here we assume the same couple earning $100,000 each. Again, 2 dependents, Living Expenses of $4,500 per month and a Credit Card Limit of $20,000. However, they now have an existing home loan of $500,000 and are looking to purchase a new investment property earning $400 per week. They are looking to understand their maximum borrowing capacity for a P&I investment loan over 30 years. The existing home loan has 25 years remaining at an interest rate of 3.50%.
What do the numbers show?
For Owner Occupied lending, our analysis confirmed a 14.19 – 15.78% increase in borrowing capacity for owner occupied lending.
*Westpac appeared an outlier at only a 5.83% increase in borrowing capacity as their online calculator would not allow an assessment rate below 6.19% pa at the time of testing.
For Investment Lending, borrowing capacity increased between 18.52%-26.46%.
Commentary
From offering almost identical borrowing capacity ($995,000) there is now a clear divergence across all banks, $1.053M – $1.152M.
For owner occupied lending, Macquarie and ANZ offer the highest borrowing capacity post changes, while Macquarie leads the pack for investment home lending.
The banks have taken the opportunity to introduce more conservative assumptions elsewhere, with credit card repayments and living expenses without making this explicitly known – there was giving with one hand, but taking with the other.
Finally, what does this mean for your finances and the property market?
So it is obvious that borrowing capacity has increased, but what does this mean for your home buying, investment or refinancing decisions?
Here’s what we think:
- You have to test your servicing with different banks – with different borrowing capacity being offered now, it’s definitely worth ‘shopping around’ to find out which bank can lend you more. You either need to take your loan to different banks yourself or use a mortgage broker to help you.
- Decide if you value higher leverage or a lower rate – this is the trade-off you’ll have to make as you start to test servicing with the banks. Typically, smaller banks have a better rate, but offer a lower borrowing capacity as their assessment rates are higher. ING is a classic case in point with an owner occupied variable rate of 3.23% pa but their assessment rate still at 8% at the time of writing.
- You can access a higher value property but which comes with higher deposit requirements – being able to borrow more may at first seem like you can purchase a higher value property – i.e. you can buy a nicer home than you first thought. However, you have to make sure you have the corresponding deposit that comes with a higher price point. For example, you’ll need an extra $25,370 in deposit to access a property at the $1.1M price point compared to $1M.
- Rises in property price will only be temporary as the underlying economy is still weak – Furthermore, price rises will not be consistent across all markets. For example, we are still seeing valuations come in dramatically low for many off-the-plan units in highly dense and built up areas of Sydney, Melbourne and Brisbane.
- This is a great time to refinance for clients looking for a better deal – borrowers that were on the cusp of passing servicing (i.e. they were showing a small servicing fail) should now be able to refinance.
This last point is particularly important for clients that took out Interest Only loans and found this type of loan reduced their borrowing capacity. These clients should now be able to refinance to P&I at very attractive rates, or if they are financially savvy clients, renew their Interest Only term. How you time your refinance applications, and depending on which bank, will also impact your overall borrowing capacity.
If you feel these insights apply to you, we encourage you to get in touch with your broker or banker to discuss how you can take advantage of the latest changes to Bank Assessment Rates.