The recent Royal Commission into Banking caused shockwaves in the financial and lending community. With new lending guidelines set to mandate massive changes to the lending industry, plenty of lenders were tightening their belts. But a recent announcement from APRA has seen that the proposed new lending guidelines on mortgage lending may be adjusted to reflect a change in attitudes.
To summarise the finer points of the APRA letter, there has been a proposal recommending that authorised deposit-taking institutions (ADIs) may no longer have to use the minimum interest rate of 7 per cent when assessing borrower capacity for repayments. Instead, ADIs may now review and set their own minimum rates when looking to create a serviceability agreement.
There’s also the proposal that any ADI service agreement will include an interest rate buffer of 2.5 per cent, which, compared to the current requirement of using the higher of either 7 per cent or 2 per cent over the loan interest rate, these new lending guidelines are going to make a difference to approval rates!
Serviceability guidelines explained
In December 2014, these serviceability guidelines were introduced as part of efforts to ensure that sound lending was being practised.
- These guidelines ensured an interest rate floor and buffer was in place to ensure that excess borrowing wasn’t happening in households across Australia.
- Borrowing measures need to be put in place to ensure the ongoing stability of the economy, and at the time, these measures were introduced we were seeing a lot of environmental factors contributing to the risks – things like high house prices, high household debt, lower interest growth and low interest rates were all abundant.
And while many of these factors still exist, the actual gap between the 7 per cent floor and the actual rate is quite wide. APRA has actually stated that the gap may be ‘unnecessarily wide’ which had led to this change.
What does this mean for you?
The likely change is that your maximum borrowing capacity will be higher. But this is not to understate the importance of APRA’s limits. The changes merely reflect that fact that the current interest rate simply ‘does not warrant a uniform mandated interest rate floor of 7 per cent across all products.” ADIs are going to be able to set their own serviceability floors and still ensure that they are meeting the necessary prudential measures which need to be in place.
- Security and stability are going to continue to hold in the economy as borrowing feasibility testing is altered to reflect the true interest rate and climate
- It will now be possible to borrow more and to have your true repayment capacity assessed against a more realistic scale
At MediPro, we know how important it is to be able to leverage your finances and get the most for your future from your investments. If these changes make the difference between you being able to afford a better investment property or a family home, then we are all for them. The biggest sign of encouragement definitely stems from the fact that the Australian Government has recognised the true disparity between this 2014 prudential measure, and the economic future of 2019 and beyond.
We’re excited to see what a difference this makes to the borrowing capacity of our clients and would love to discuss this with you in more detail. Call us today on 1300 375 626 or contact us online to find out about getting your home loan approved sooner.
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