Back on the 25th May in a COMPASS breaking news item, I highlighted that some changes were imminent in regard to how banks would assess customer’s ‘borrowing capacity’. At that time, discussions were being held with (APRA) the Australian Prudential Regulation Authority, and approved deposit institutions (the lenders), to hand back authority as it were to the lenders in setting a minimum floor limit for calculating how much a customer could borrow.
The revised limit would be set by the lenders, as it had been some five years earlier, and would be more reflective of the current environment of low interest rates & risk. With variable home loan interest rates now getting closer to 3%, and the likelihood that they could remain there for some time, to assess a borrowing capacity at a rate of 7.25% as was the case with most lenders, could be seen as being overly cautious. To ensure a reasonable measure of caution was maintained the lenders have in most cases opted to increase their ‘buffer’ that they build in to the assessment. A buffer figure of 2.50% is the generally accepted position. That buffer, plus the actual interest rate the client will be paying, will now make up the end borrowing capacity calculation, with each lender’s floor limit adopted as being the minimum. It should be noted that if variable home loan interest rates continue to fall the floor limit will not automatically follow. Lenders have essentially adopted the same principal of a ‘floor limit’ as was the case when APRA was overseeing it.
In view of the above, at the time of writing this article , several major banks plus some second tier lenders had already set in place their new borrowing capacity floor limits, and other lenders have to follow in order to remain competitive. Those that have already set their revised floor are:-
ANZ
Macquarie
Suncorp
Westpac Group
The new floor limits for the above four range between 5.30% and 5.75%, and includes the 2.50% buffer. The actual effect on borrowing capacity in dollar terms is difficult to measure because of other unknown variables, but by just isolating this element, and using the following as an example, a reduction of some 1.75% in the assessment rate (going from 7.25% to 5.50%) could mean a customer being able to borrow an additional $50000 to $100000. Each individual’s full financial circumstances would need to be considered in order to provide an accurate position, but suffice to say this is more reflective and realistic of the current low economic growth environment. As long as ‘best interest’ practice is adopted in analysing a client’s position, then this is a positive move for borrowers.
Please contact me on 6583 2211 to discuss your own personal situation and the opportunities it may present.