Recently, APRA has put forth a new proposed guideline that could see lenders adjust their servicing rates, which could be a life changer for investors.
The Australian Prudential Regulation Authority (APRA) is responsible for the regulation of banks and other institutions in order to keep the financial system stable. APRA’s 2014 guidelines required lenders to impose strict serviceability assessment rates that incorporated a buffer of at least 2% above the actual loan product rate, with a minimum floor rate of 7%1 (which has seen most lenders use a buffer rate between 7.25% – 8.15% to ensure borrowers can afford their loans).
The new proposed Guideline is suggesting that lenders be able to apply a buffer between 2% – 2.5% to the actual product rate applicable. This means that lenders will be able to assess borrowers on their ability to make payments if the interest rate was 6% to 7% instead of the 7.25% to 8.15% we are currently seeing. Additionally, should the next two predicted Reserve Bank of Australia (RBA) cash rate cuts be passed on, it would allow lenders to assess borrowers on their ability to repay at a further reduced rate of 5.5% to 6.5%.
So why are we excited about this?
Because many of Trilogy’s clients, who earn an average household income and hold two or three properties, have been struggling with the lender’s serviceability requirements (particularly when it comes to extending interest only terms or looking to refinance for a better deal). These changes would see a large amount of our clients who; for the first time in years, may be able to review their lending, extend their interest only terms and potentially even make a new purchase.
I have conducted some preliminary modelling on how the proposed changes could affect the average property investor;
John and Jane Smith with two children and combined yearly incomes of $140,000 PAYG and $35,000 rental income; will go from an estimated debt limit (maximum borrowing potential) of $860,000 to nearly $1,040,000. That is enough breathing room to look for a better deal, re-organise your borrowings, obtain an equity lease for renovations, or granny flat editions etc.
If you have been the victim of the tighter lending conditions, now might be the time to give us a call and see if the proposed changes might benefit you.
A word from APRA
APRA Chair Wayne Byres says…
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk. Although many of those risk factors remain – high house prices, low-interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor,” Mr Byres said.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards. Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7% across all products.2