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With regulators having applied the brakes to lending in recent years, (some estimates claim borrowing capacity has reduced by as much as 30%) the Australian Prudential Regulation Authority (APRA) has decided to lower the minimum interest rate serviceability buffer from 7% to a level determined by lenders.
The removal of this interest rate floor comes in an environment of flat house prices, low credit growth, and record low interest rates. It has been a requirement that lenders use the greater of an interest rate of 7.25% or a 2% ‘buffer’ on top of the loans actual rate, to factor in a potential rate rise and ensure the loans ongoing affordability.
What does this mean for borrowers?
The two-fold bonus for borrowers is that monthly repayments are falling (with lower interest rates) and borrowing capacity has increased. As a rough guide, someone with a prior borrowing capacity of $500,000 may now be able to borrow an additional $50,000.
Has your bank passed on the full rate cut?
As regulators attempt to free the economy, it is unfortunate that not all lenders have chosen to pass on the full rate cuts. It’s worthwhile checking to see how your bank has performed in this regard. As another example, a 0.25% interest rate cut should result in a saving of about $58/month on a $400,000 loan. We’d advise you to check your statements to see how you’ve fared. For a P&I home loan you should be closer to 3% than 4%.
Fixed rate carrots
Most lenders are currently offering exceptionally low fixed rates. As I write, an offer of 2.94% for 2 years (with offset account) is being promoted. In a falling market, borrowers have been understandably reluctant to take up these offers, but there are some incredible rates around and could represent an ideal solution for some. Talk to us to see if fixing is an option for you.
If at first you don’t succeed
The time is now right to re-apply if you have been recently declined. Please feel free to make contact with us if you’d like to establish your borrowing capacity or learn more about your lending options.