A boost for borrowers

APRA’s change to the serviceability assessment rate has been met with positivity, as many dubbed the rate introduced in 2014 outdated, but there are still questions as to whether it will make borrowing easier

While many expect the changes to lenders’ serviceability assessment rates to make borrowing easier, others believe the expansion of comprehensive credit reporting and other regulations may impose higher standards on the banks.

APRA confirmed at the start of July that it would no longer expect authorised deposit taking institutions to assess home loan applications using a minimum interest rate of at least 7%. Common industry practice has been to use a rate of 7.25%.

Banks will instead be able to set their own serviceability rates, with a revised interest buffer of at least 2.5% above their loans’ interest rates.

Making the announcement, APRA chair Wayne Byres said “a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards”.

The move could mean that many borrowers who have been denied finance because of the guidance issued in 2014 are now eligible for loans. But it seemed at first that the banks were taking a cautious approach to APRA’s decision, and some commentators, like the FBAA’s managing director, Peter White, encouraged them to respond more quickly.

“Brokers are trying to help buyers purchase a home, but banks have been holding them ransom,” he said.

ANZ was the first major bank to announce a change to its floor rate, amending it to 5.50%. Westpac followed suit with 5.75% and CBA later announced the same.

NAB was the last of the big four to drop the rate, saying it welcomed APRA’s change and moving to 5.50%. All banks also revised their interest buffers to 2.5%.

White praised APRA’s decision, in the hope that it would give the Australian economy a much-needed boost.

“With most lending institutions offering interest rates between 3% and 4%, an assessment rate of 7.25% was unfair.

“As brokers it makes it more difficult to get approval and creates immense disappointment and confusion for clients if banks use outdated data to assess the suitability of average Australians to pay off their home,” White said.

“The reduction in the assessment rate will make it easier for existing borrowers to refinance so they can escape their existing mortgage prisons because of unreasonable rates and conditions.”

“The reduction in the assessment rate will make it easier for existing borrowers to refinance so they can escape their existing mortgage prisons” Peter White, FBAA

How homeowners will be affected

Analysis of what APRA’s announcement really means shows that many Australians may be able to boost their borrowing power by tens of thousands of dollars. A family on an average household income of $109,688 should be able to borrow up to around $60,000 more, even if their loan is assessed at a rate of 6.25%, according to RateCity.com.au.

Research director Sally Tindall said that if more people could suddenly get their home loans approved, house prices could start to increase again.

“Australia is in a very different home lending landscape than when the 7% buffer was made in 2014. It was time to reassess what has become an out-of-date interest rate floor, especially on the back of two RBA rate cuts,” Tindall said.

“APRA has eased off the brakes slightly, but that doesn’t mean it will be a complete field day for borrowers. There are still a number of checks and balances in place to make sure people aren’t jumping into home loans they can’t afford to repay.

“APRA is also allowing banks to set more than one interest rate floor, acknowledging that lenders often charge lower rates for some loan types, such as owner-occupiers.”

“Borrowing is going to become somewhat easier as APRA makes the changes it is proposing and mortgage rates have reduced” Cameron Kusher, CoreLogic

A level of caution

While the outlook is mostly positive for accessibility of finance, CoreLogic analyst Cameron Kusher has looked at other changes in the wider landscape that will have an impact.

Firstly, from 1 July, comprehensive credit reporting has been expanded, so lenders will now have more information on credit history, including types of accounts, dates the accounts were opened, current credit limits and account closed dates, as well as two years of repayment history.

“Given this, lenders will have a lot more information about borrowers’ credit histories and will seemingly have fewer excuses for providing loans to those that aren’t creditworthy,” Kusher said.

Secondly, the industry has seen the adoption of the new Banking Code of Conduct, which sets stringent standards for anyone applying for a loan, whether for a home or a small business.

“On one hand you can see borrowing is going to become somewhat easier as APRA makes the changes it is proposing and mortgage rates have reduced on the back of the two interest rate cuts we’ve had.

“On the other hand, the expansion of comprehensive credit reporting gives lenders much more insight into the creditworthiness of borrowers, and the new Banking Code of Conduct appears to be requiring much higher standards from the banks,” he said.

“Furthermore, banks continue to have a very close focus on living expenses assessment when deciding whether a borrower is creditworthy.

“Given all of this, we believe that mortgage credit is going to become a little more accessible; however, there will remain a level of conservatism and caution from lenders – especially given the royal commission that has recently occurred and the fact that they have much more data available to them in order to make decisions about the creditworthiness of borrowers.”