Read on to understand what a relaxation in lending standards could do for new and existing borrowers.
After the tightening of lending standards over the past 12 months, it looks like things are loosening which will provide a big boost for,
- potential borrowers looking to buy property and
- existing borrowers who need to refinance!
This is because, earlier this week the Australian Prudential Regulation Authority (APRA) who is responsible for overseeing the prudent lending standards in Australia announced that it had begun consultation with major lenders or ADIs (Authorised Deposit-Taking Institutions) to ease lending standards for new and existing residential mortgage applicants.
As outlined in APRAs media release, “APRA is proposing to:
- remove the quantitative guidance on the level of the serviceability floor rate, i.e. the reference to a specific 7 per cent floor. APRA will still expect ADIs to determine, and keep under regular review, their own level of floor rate, but ADIs will be able to choose a prudent level based on their own portfolio mix, risk appetite and other circumstances;
- increase the expected level of the serviceability buffer from at least 2 per cent (most ADIs currently use 2.25 per cent) to 2.5 per cent, to maintain prudence in overall serviceability assessments; and
- remove the expectation that a prudent ADI would use a buffer ‘comfortably above’ the proposed 2.5 per cent, to improve clarity of the prudential guidance.”
This means that rather than assessing a 30 year loan based on Principal and Interest repayments at an interest rate of 7% to 7.5%, lending assessments would be based off say the proposed interest rate of lets say 3.60% to 3.90% plus 2.50% being 6.10% to 6.40%.
Should the assessment rate reduce to 6.40% from 7.25%, a borrowers borrowing power will increase by 9%. For example where a borrowers maximum borrowing power is $500,000 at present, this could increase to $545,299 or more should the changes be implemented.
Internally, the banks are currently reviewing the impact of this and naturally adoption of any reduction in the rate used for servicing will only be adopted by banks where it is considered prudent within their own servicing guidelines.
Should this be implemented by APRA post 18 June 2019, it is likely that some banks will be early adopters, whereas other banks won’t change or may delay any changes.
In doing so, this further highlights the need for customers to make sure they are talking to their broker to get the right lending advice to maximise their chances of getting their loan approved.
Further the changes are likely to create better opportunities for smaller players who offer more competitive interest rates then the Big 4 banks.
This is extremely positive for existing and aspiring borrowers and comes as,
- the outlook for interest rates is lower for longer,
- there is now a significant differential between the current interest rate for owner occupied home loans typically in the mid to high 3% range versus a minimum servicing assessment rate of 7% (although typically 7.25% to 7.50%),
- there is an expectation that the Reserve Bank of Australia (RBA) will cut interest rates by 0.25% to 1.25% at its next meeting on 4 June and
- lending standards being tightened so much over the past year, requiring APRA to assist in the loosening of these standards to stop the Sydney and Melbourne house price fulls.
So whether you’re considering refinancing or looking to maximise your borrowing power for a potential purchase, please get in touch to make sure you’re matched with the right lender and the best loan for your circumstances.
With over 40 providers to select from on your behalf, I’ll make sure you’re situated in the strongest position to acquire your next biggest investment – your home.
All the best, Campbell.
APRA’s full media release can be found by clicking here.