You may have heard that APRA lifted the minimum interest rate buffer that banks are expected to use when assessing a borrower’s serviceability when applying for a residential loan.
The interest rate buffer also know as the serviceability buffer is the amount that is automatically added by a bank to the market interest rate when they are assessing your home loan application.
Previously banks have used a 2.5% serviceability buffer on top of the market interest rate to assess your serviceability. This means that with an interest rate of 2.19% your ability to pay off your loan will be assessed by the bank on an interest rate of 4.69% using the 2.5% interest buffer.
On 6 October 2021, APRA instructed banks to lift the serviceability buffer to 3%, an increase of 0.5%. This means that on the same loan at an interest rate of 2.19%, the bank will need to assess your borrowing power at a interest rate of 5.19% to accommodate the 0.5% increase.
So What Does this Mean for the Average Borrower?
You will still be able to access the record low interest rates that we have been enjoying recently but your borrowing capacity will be reduced. In fact, this change is estimated to impact residential borrowers by reducing their borrowing capacity by about 5%. For Example, a borrower that was able to borrow $1,000,000 will only be serviceable to borrow $950,000 applying the new 3% interest rate buffer.
How will the Banks Assess New Property Loans and First Home Buyers?
Your ability to service your loan will be assessed using the new 3% buffer so the amount that you can borrow will be reduced. This means that if you are usually serviceable for a loan of $750,000 at an 80% Loan to Value Ratio (LVR), you will only be able to borrow $712,500 due to the 0.5% increase in the banks serviceability buffer.
How Will this Change Affect Existing Home Loans?
This change to the banks borrower serviceability assessment will not affect any existing loans as you were assessed on your ability to service your loan when you applied for the loan so they will not need to recheck your serviceability.
What if I Want to Refinance my Existing Loan?
Unfortunately, if you want to refinance you will be affected by the APRA changes as your ability to service your loan will now be assessed using the 3% buffer not the 2.5% buffer that your original borrowing capacity was assessed at.
This will not mean that you cannot or should not refinance your existing loan, but it does require a proper review of your financial situation and current serviceability based on the 0.5% increase in the bank’s serviceability buffer. A good Finance Broker will be able to review your financial situation and let you know if it is worthwhile for you to refinance your loan and which lenders will provide the best interest rate and features for your personal situation.
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