Borrowing Capacities Increase
The property market is bound to see a shift in sentiment in the coming 3-6 months as the flow on effect of several factors comes to bear. The inexorable effect the Australian property market has on the economy cannot be overstated, and the changes we are seeing is long overdue and will positively impact many sections of the Australian economy.
First and Second, the RBA interest rate cuts in June and July will see borrowers paying less on mortgages and hence give them more confidence to spend to stimulate the economy. A household with a mortgage of $500,000 will save between $35 and $48 per week as a result of the cuts.
Third, the proposed amendment to the ‘floor rate’ for assessing mortgages as recommended by APRA has finally started to flow through to lender’s policies and processes. All major banks and many non-major banks have removed the floor (previously 7.25%pa) on assessing new and existing loans and instituted a floor of 5.75% or 2.50% above actual customer rate (whichever ends up higher).
By my modelling this change would mean the following for a person or household seeking to borrow or $800,000:
- with a 7.25%pa floor on assessment rate the borrowings would be assessed at an annual cost of $65,488
- with a 5.75%pa floor on assessment rate the borrowings would be assessed at an annual cost of $56,022
This is a reduction of nearly $10K in net income mortgage applicants would need to show they earn in order to borrow $800,000 (whether that’s a refinance or a purchase). Note that this is despite the fact that whatever the assessment floor rate, the actual annual cost would be approximately $42,520.
So why make the change? Isn’t APRA mean to protect depositors by putting in place prudent lending guidelines for bank?
In it’s most recent media release APRA states “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards”.
The answer lies in the economy as a whole. Inflation is so low some are predicting further rate cuts and the possibility of a negative cash rate and even a recession. APRA received APRA is not responsible for the economy, but it can’t ignore the economic headwinds that have forecasters predicting historically low rates for many years to come.
In it’s initial media release APRA stated “With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”
Contact us today on 1800 93 10 20 if you have put off a buying decision or postponed going through with a refinance due to your borrowing capacity so we can help you reassess your options.
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