The cash rate is determined by the Reserve Bank of Australia. This is what RBA charges the commercial banks to borrow money from them. Currently it is at 1%. So now the banks borrow money and pay a rate. Then they add their own profit margin on top and sell their money to us.
That is the borrower’s rate, or what we commonly see advertised as a home loan interest rate. Currently it is around 3.18% for home buyers depending on the bank.
Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.
APRA sets the assessment rate as a minimum standard for the lenders to use. That’s the buffer they use to calculate if you could afford to repay your loan if interest rates go up.
The guideline used to be a minimum of 2% or 3% above the home loan rate but in December 2014 APRA set the minimum to 7%. They did this to enforce responsible lending practices within the banking industry that they oversee.
On Tuesday 21st May, APRA Chair Wayne Byres advised they have begun consulting on possible revisions to the assessment rate. Should the changes go ahead, Byres believes it would provide banks with greater flexibility when assessing potential customers as well as maintain an appropriate measure to determine a borrower’s ability to meet monthly repayments.
And this month they reviewed and suggested that under current financial environment banks do not need to assess borrowers at 7% anymore and they should be using 2-2.5% above the base interest for serviceability.
Westpac jumped on it last month, made news and then back tracked giving indication that the banks are under no obligation to adhere to APRA’s guidelines but this month ANZ came forward dropping the assessment rate to 5.5% and Westpac and Macquarie Bank followed.
How is this new change being looked at?
Different people have different views to this, some think lowering the assessment rate is a good idea, but it could be better to implement in a year once the property market subsides and stays steady. Some fears about borrowers biting off more than they can chew.
Others suggested that borrowers need to reflect seriously on what they’re getting into – they need to assess their situation looking into the future and they need to ask themselves a big question-
How will they keep up with your repayments if rates go up or if your circumstances change?
The Big Difference
“With interest rates at record low, and likely to remain at historically low levels for some time, the gap between the 7 percent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” chairman of APRA Wayne Byres said.
*For a couple with two children with a household income of $100,000 a year, can potentially borrow around $493,000 at 5.5% assessment rate, which is nearly $60,000 more if the bank was using an assessment rate of 7.25 percent, currently still used by most of the banks.
How can we help?
We have over 40 lenders on our panel and their serviceability calculators so we can work out your borrowing power before submitting your home loan application. There is solution to almost every situation.
Disclaimer statement: Your full financial situation would need to be reviewed prior to acceptance of any offer or product.
* Calculations are approximate only, and not taking into account your personal and financial circumstances. Please contact your Broker or Bank before making any financial decision.
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