Q. What are the changes Australia Prudential Regulation Authority (APRA) has made to the assessment rate for authorised deposit institutions (ADIs)?
A: APRA has confirmed it will allow Authorised Deposit Institutions (ADIs), being most banks and lenders, to change the rate at which they assess a customers’ ability to service their loans.
Prior to the change an ADI assessed your income and expenses and determined your ability to service the loan at a 7 per cent affordability rate. This buffer is designed to ensure that you will still be able to service the loan should interest rates increase. Following the most recent changes, APRA have confirmed they have changed the affordability rate and advised how it should be calculated. ADIs can now use 2.5% plus their minimum interest rate to get there affordability rate.
For example, if a lender’s minimum interest rate is 3.5%, you add the 2.5% which will give an affordability rate of 6%. This means different lenders will have different affordability rates based on their minimum interest rates, therefore increasing competition in the home loan market. Prior to the change a borrower was assessed at 7%. Previously if a lender had determined a borrowing capacity of $750,000 based on income and expenses, this would now be increased by 1%, or in this case $7,500, giving a new borrowing capacity of $757,500.
This is a welcome change for those with a mortgage or anyone looking to get into the property market or expand their property portfolio. Now you should be asking yourself how best I can take advantage of the current historically low interest rates, recent rate cuts, current property market conditions and this new low assessment rate to my benefit.
Q: How can I benefit from this new affordability rate?
Your ability to compete in the property market is now greater and you can afford more high value properties meaning properties that might have more bedrooms, bathrooms or even a pool in the backyard in more desirable locations, etc. This change is relevant not only for a first home buyer looking to buy their first home, owner occupiers looking to capitalise on their existing equity but also for property investors looking for investment grade properties.