Why your borrowing power is set to increase
By Don Crellin, Managing Director.
When property markets were booming, stricter rules were introduced to limit the amount Australians could borrow to buy a property. The banks were required to have specific buffers in place to protect people from over extending and not being able to repay their debt if interest rates rose.
But today, the world is a different place. We’ve seen interest rates fall, not rise, and we’re expecting more decreases to come. The current restrictions don’t suit today’s economic outlook or property market so the Australian Prudential Regulation Authority (APRA), who supervises the banks, has made changes to borrowing limits. This means you should now be able to borrow more.
Greater borrowing power is just around the corner
Before, when you wanted a loan, most banks would assess your situation to see if you could repay your mortgage at an interest rate of 7.25%. If you couldn’t, you’d have to borrow less, which meant you may not have a been able to buy the property you wanted.
But now APRA have said it will change the guidance on this rate. Instead, they are now asking the banks to test whether you can afford to repay your loan at the interest rate they’ve quoted, plus a 2.5% buffer. So for example, if your interest rate was 3.5%, they’d assess to see if you could still repay your loan at an interest rate of 6%. This buffer is a minimum requirement and each bank will set their own guides. This means there will still be restrictions around how much you can borrow, but they just won’t be as tight.
How much more can I borrow now?
In most situations, all things being equal and depending on how banks apply this new guidance, it means you may be able to borrow up to 10% more.
While everyone will be assessed on an individual basis, banks will look at your household income and expenses and the make-up of your family (single, couple, with or without children) as a start. Here are some examples of how much more a single person could borrow. Note this is hypothetical and you will need to speak to a mortgage broker to get an accurate figure of how much more you should be able to borrow.
|Salary – single person||How much more you could potentially borrow|
Source: Resolve Finance. Calculations are based on a standard variable interest rate of 3.75%. This assumes an assessment rate of 6.25% (including a 2.5% buffer) versus the current assessment rate of 7.25%. Assumes a single person with a ‘pay as you go’ salary, with no children. Living expenses based on the Household Expenditure Measure.
Does this mean the banks are loosening their credit standards?
Absolutely not. In 2014, these regulations, along with other measures, made sense for the market conditions at the time. But in a low interest world, against a different economic backdrop, these restrictions are unnecessarily high. What’s more, banks are increasingly scrutinising their mortgage assessment measures and are now taking a forensic approach to reviewing customers’ spending patterns, so prospective mortgage customers will be assessed from a range of different angles.
Find out exactly how much more you can borrow now
Speak to a mortgage broker about your personal situation to find out where you stand today. Once banks adopt these changes (and we know each bank will take a different approach) we can then update you on your increased borrowing amount. Contact a Resolve Finance broker today by clicking here.