The RBA has officially cut interest rates for the first time since August 2016, making it the lowest rate on record at 1.25%. Along with this welcome rate reduction, which should be passed on by lenders, today’s RBA meeting will also see banks change the way they assess loan serviceability – the ability of a borrower to meet loan repayments.
In 2014, banking regulatory authority APRA introduced tighter serviceability guidelines in order to reign in an out-of-control property market. They also instructed banks to reduce the number of home loans being paid as ‘Interest Only’, and to balance the books between investors and homeowners. To achieve this, banks introduced higher rates for Interest Only loans and charged more if the loan was for investment purposes. But one of the most telling guidelines was the ‘Servicing’ rate of 7.25% when calculating if a borrower earned enough for a certain loan amount, irrespective of the rate that the borrower would pay.
On May 21, APRA communicated with lenders advising that they are proposing to change this 7.25% serviceability rate to a calculation of 2.5% above the actual rate being charged. So, with a home loan of 3.60%, serviceability would be calculated at 6.1%. For a couple on $120,000 pa, a child and normal living costs, this may make a difference of up to $50,000 in the allowable loan amount!
Now more than ever it’s important to have your loan reviewed to see how competitive it is, and to ensure it is structured correctly. Your current bank isn’t likely to let you know there are better deals out there, which is why 60% of loans are now being managed by Mortgage Brokers.
Email Ash today to organise your complimentary home loan review meeting, or call us on 9887 8751.