When it comes to gaining approval for a mortgage, there is a lot of red tape. However, due to the current economic environment of low interest rates, low inflation and low wage growth, the current standards are no longer appropriate.
The Australian Prudential Regulation Authority (APRA) who supervises the financial services industry, has proposed to lower the hoop that prospective homeowners have to jump through to gain approval for a mortgage.
What has been proposed?
Currently, an Authorised Deposit-taking Institution (ADI) assesses loan serviceability at a minimum interest rate of 7%. In fact, the typical rate used as an assessment rate by ADI’s on mortgages is 7.25%, with some conservative lenders using 7.5%.
However, it has been identified by APRA that a minimum of 7% is not an accurate reflection of the current economic climate. As a result, APRA has proposed the following changes to the regulations effective immediately:
- Remove the requirement that ADI’s implement a 7% minimum serviceability floor rate
- ADI’s can review and set their own minimum interest rate for loan assessment using a buffer of at least 2.5% over the actual loan rate.
What does this mean for prospective homeowners?
For home buyers, this will assist in opening more doors than were previously not possible. As the cash rate is now 1% and with commercial mortgage rates being relatively low, when the 2.5% buffer is applied, the minimum assessment rate will be substantially lower than the 7.25% that is currently used. This new assessment criteria means more applicants will have their mortgage application approved to purchase their own home and may also have access to more funds than before.
In light of the changes to the cash rate by the RBA in June and July and the easing of housing prices in the market, these regulation changes will create some interesting times in the property market.
For more information about how these changes can provide new lending opportunities for you, contact our team of finance consultants at Morrows Lending Solutions.