Applying for a home loan may have just become easier with Australian Prudential Regulation Authority (APRA) removing the minimum rate used in serviceability calculations by lenders.
The serviceability calculation is a test used by lenders to determine if a customer can afford to pay off their home loan if there was an increase in interest rates.
Most lenders rely on their own variation of a basic formula to calculate your ability to service a loan. They look at elements such as your gross income, existing commitments, new commitments, living expenses and a buffer.
Until early July, lenders used an interest rate of 7.25% (or higher) in their calculations as a floor rate. However, this has now been removed with lenders being able to set their own floor rate. The big four lenders have set their new serviceability floor rates at either 5.5% or 5.75%. This is determined by the rate you actually pay plus a margin of 2.5%.
What does this mean to potential borrowers?
If you couldn’t get a mortgage previously, you may now be eligible.
A single applicant with an annual income of $50,000 who is looking to purchase an owner-occupied property at 90% LVR with no other debts.
Based on the previous assessment requirements, the applicant could only borrow $310,000.
Now with the new servicing rates they can borrow $355,000.
Factors to keep in mind that affect your serviceability include credit card limits, personal loans and other debts. Your current rate will also heavily affect your serviceability due to this new buffer rate.
Want to know how much you can borrow now?
Call us today (08) 9242 3300 or email email@example.com.
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