For mortgage holders, changes to your borrowing capacity are likely in 2019. With the low interest environment now a firm part of the financial landscape, there has been pressure to adjust mortgage lending criteria.
For background, The Australian Prudential Regulation Authority (“APRA”) is a Government authority to supervise the financial system. In 2017, they introduced Prudential Practice Guide APG 223 Residential Mortgage Lending. It included the need for a single floor assessment interest rate for ADI’s to follow when assessing mortgages.
It is now proposing changes to this serviceability benchmark. APRA chair Wayne Byres stated,“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”
A proposal is to reinstate a “buffer rate” of say 2.50%. In our view this makes sense, with interest rates on mortgages now being more diverse (repayment type, loan purpose). A single rate is therefore no longer representative of risk.
A reminder that this is not finalised , though we have prepared below a small insight into how a change could impact borrowing capacity.
As an example, if you have a current borrowing capacity of say $700,000 – a 1% change to the assessment rate (to 6.25%) would yield an additional $75,000 in borrowing capacity.
We have had a number of stakeholders contact us to see when and if changes will flow through.
APRA is conducting a four-week consultation that will close on 18 June. They will then release a final version of the updated APG 223 shortly afterwards.
It will then be up to the banks to jostle around with their modelling to see where it will all land.
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