As a home buyer or existing borrower you may soon be set for a borrowing boost because of a combination of changes to lending assessment criteria and today’s RBA announcement of a rate cut of 0.25% to a historic low of 1.25%.
With the low interest environment expected to continue into the future and numerous economists predicting further rate cuts, the Australian Prudential Regulation Authority (“APRA”) have proposed a change to the current mortgage lending criteria which will boost individual borrowing capacity.
BACKGROUND
In 2017, APRA introduced Prudential Practice Guide APG 223 Residential Mortgage Lending. Included in this was the requirement for a single floor assessment interest rate for Authorised Deposit-Taking Institutions (“ADI’s”) to follow when assessing mortgages.
A minimum floor rate of 7.25% was proposed and the lenders have adopted a servicing rate of between 7.25 and 8% to assess mortgage repayment capacity over recent years.
It is now proposing changes to this serviceability benchmark. APRA chair Wayne Byres stated,“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”
APRA have now proposed to reinstate a “buffer rate” of 2.50% above the actual interest rate that a borrower pays.
POTENTIAL IMPACT OF CHANGE
It is important to remember that APRA is currently conducting a four-week consultation with the ADIs that will close on 18 June at which time they will release an updated version of APG 223.
Following this it will then be up to the Banks to decide how they will implement the new guideline.
If you’d like further information on how these changes may affect you, drop us a line.
