Photo by Tierra Mallorca
Photo by Tierra Mallorca
Two of the big four banks have cut their serviceability rates, in line with changes to rules by the Australian Prudential Regulation Authority (APRA).
Westpac yesterday cut its serviceability rate from 7.25% to 5.75%, with a buffer rate of 2.5%, while ANZ last week cut its rates to 5.5% and 2.5% respectively.
Westpac-owned St. George Bank, Bank of Melbourne and BankSA have also followed Westpac’s lead by cutting their serviceability rates to 5.75%.
This comes 11 days after the APRA removed the serviceability buffer that required banks to assess all borrowers against their capacity to repay a loan at 7%.
Under these changes, banks would now only have to add a 2.5% buffer on current interest rates to review whether the home loan is suitable for the borrower.
APRA chair Wayne Byres said that the previous 7.25% serviceability rate was too high in today’s economy but urged banks to continue to be vigilant in their lending process.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” Mr Byres said.
“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs (authorised deposit-taking institutions) actively consider their portfolio mix and risk appetite in setting their own serviceability floors.”
What are serviceability rates?
Serviceability rates are what banks use to assess how much money you are financially capable of borrowing.
A buffer rate is what lenders will add to their interest rate to calculate whether you will be able to afford the loan, should interest rates rise over the course of its life.
Banks will take into account a customer’s income and expenses and then add their buffer rate to the interest rate they’re offering.
For example, Westpac’s lowest variable home loan (owner-occupier) rate with principal and interest repayments is 3.78% p.a. (3.79% comp rate) at the time of writing.
Under the new serviceability rates, they would add their 2.5% buffer rate to this, coming to 6.28% p.a.
As this is above their minimum serviceability rate of 5.75%, a borrower would be assessed at a rate of 6.28%.
How will this affect the housing market?
Simon Pressley, Head of Research at property market research firm Propertyology, said these changes are long overdue and will benefit all Australians.
“While no doubt well-intended, credit policy in Australia had progressively become the tightest in our 200+ year history,” Mr Pressley told Savings.com.au.
“It was causing harm to our national economy and depriving thousands of deserving Australians from the opportunity of realising important life goals.
“There’s nothing within our financial ecosystem that has bigger tentacles than the property sector. To choke the property sector is to choke the economy.”
Mr Pressley said the changes will help every market across the country.
“Whether a first home buyer, an upgrader, a downsizer, or a property investor, the policy change benefits all real estate buyers,” he said.
“And the two recent interest rate cuts by the RBA means that there’s never been a more affordable time for existing Australians to act on their goals.
“It will give the likes of Brisbane, Adelaide, Perth and dozens of great regional locations a chance to perform somewhere close to their exciting potential, while the rate of decline (in Sydney and Melbourne) is likely to ease from 10% per year to nominal rates.”
Mr Pressley also said it’s only a matter of time before other banks follow suit.
“It is inevitable that every lending institution will take full advantage of APRA’s decision to re-set loan assessment rates before too long.”
Low variable rate home loans
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 May 2020. View disclaimer.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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