In December 2014 APRA introduced the serviceability guidance as part of a package of measures designed to reinforce residential lending standards where the lenders were using a minimum interest rate of at least 7 per cent to assess home loan applications. However, it was a common industry practice to use a rate of 7.25 per cent.
In a letter issued just last week The Australian Prudential Regulation Authority (APRA) announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage applications.
After considering the submissions, Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.
Mr. Byres said:
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,”
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”
Here on lenders will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan's interest rate.
The new guidance takes effect immediately.
How would the new APRA changes impact you?
To put it simply, mathematically this should help increase the overall borrowing capacity. The proposed changes effectively mean that instead of calculating/assessing the ability to repay the mortgage at 7.25 per cent the new assessment rate could drop drown to well below 7 per cent given the current mortgage interest rate market.
What's the new mortgage assessment rate?
The new mortgage assessment rate will now depend on the lender and their overall risk appetite. So far as of publishing this post on the 8th of July 2019 unfortunately no lender have come out with any kind of indication as to i) if they would change the assessment rate and ii) what would the new assessment rate would be
Final thoughts on the new mortgage assessment rate
It's a move that's clearly going to help borrowers given the current market conditions. In the recent past, wage growth clearly did not keep up with the property price growth. This created issues for the potentially borrowers. The new changes to the assessment rates is clearly a move in the right direction.