APRA lifts assessment rates and reduces borrowing power
5 min read
On October 6, APRA has advised they will be requiring banks to increase the assessment rates they use by a further 0.50 per cent.
What’s the difference between assessment rate and interest rate?
The interest rate referred to is the current rate of interest you are required to pay on the principal of your home loan. For example, on a home loan of $1,000,000 with a 2% interest rate, your repayments would be $3,696 per month. This is what you personally would look at when considering your repayments and whether it fits within your budget at that point in time.
The assessment rate is what the lenders use when they calculate your ability to afford the loan (also known as serviceability). Serviceability is where they look at your overall income and expenses then calculate what you can afford to repay and whether you can continue to meet your repayments should interest rates increase in the future. Using our above example of a $1,000,000 home loan, the assessment rate has previously been 4.50% and repayments would be calculated at $5,067 per month.
If this repayment figure is within your budget at the higher assessment rate, the lender would agree that you can “service” on the loan. If you can afford $3,696 but not $5,067 then the lender would advise you cannot service this loan and would offer you a reduced loan amount.
What does the increase in assessment rate mean?
Using the above scenario again, a home loan of $1,000,000 will now be assessed on a 5% rate, not a 4.5% rate. This means to “service” the loan, you would need to be able to afford repayments of $5,368 and not $5,067 or the $3,696 you would actually have to pay each month.
A higher assessment rate means you won’t be able to borrow as much as before. That said, some lenders already used an assessment rate which exceeds the minimum set by APRA. For instance, one of the big 4 uses an assessment rate of 5.35% and ING Bank uses an assessment rate of 6.10% (one of the highest in the market).
In practical terms, this new minimum assessment rate may not have very much of an impact on your borrowing power depending on which lender you are looking to go with.
Why have APRA introduced these changes?
The housing market has been growing at a record rate each month (indeed, at its highest annual rate of growth since June 1989) across the country and there are concerns about affordability. These changes aren’t expected to reduce house prices or reverse the growth, but the plan is to slow how fast prices are increasing.
APRA were also talking about bringing in an upper limit on how much you could borrow, being no more than 6 times your gross income (also known as debt-to-income ratio). This hasn’t occurred as yet, but may still be on the cards.
Calculate your repayments
Want to calculate repayments for yourself? Check out our online Repayment Calculator here.
Not sure how these changes may affect you? Speak to an Entourage broker today.