Two weeks ago, APRA told the banks that it no longer expects them to use a benchmark interest rate of 7.25% when testing an applicant’s borrowing capacity. Instead, they must add a buffer of at least 2.50% onto the loan’s interest rate. Given most home loan interest rates are in the 3’s, that could substantially improve your borrowing capacity.
The banks are starting to push back on regulators
Until now, the banks have remained relatively silent about the government’s crackdown on lending standards which has resulted in a severe reduction in borrowing capacity. Of course, they have wanted to stay out of the limelight given recent bad press from the Royal Commission. However, they have now found their voice and have said the level of tightening is
impractical, anti-competitive and potentially damaging to the economy.
ASIC will hold
public hearings in in August as part of its public consultation process. The banks will have an opportunity to voice their concerns in a more public arena.
How banks assess your borrowing capacity
The banks will typically make a number of adjustments to assess your ability to service debt. Whilst all lenders have different rules, the below formula summaries the banks typical approach.
The table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.
The impact of the recent benchmark interest rate reduction
Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4’s borrowing capacity using the same inputs and the table below summarises my findings.
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