How an assessment rate can kill your home loan application

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What exactly is a mortgage assessment rate – and more importantly, how can it impact your ability to get a home loan?
There is a common misconception in the marketplace that lenders assess your ability to repay a home loan based on interest rates at the time of your loan application. 
But as Smartline personal mortgage adviser Kim Wight clarifies, this is not the case. 
During the life of a loan, interest rates will rise and fall and when lenders assess a borrower’s loan application, they do so based on an inflated interest rate, as it gives both the lender and the borrower confidence that the loan repayments can be made without undue hardship.
“All lenders assess a loan application using their own mortgage assessment rate, which is a buffer they add into the interest rate,” Wight explains.
“It can be anything from 1.0% to 2.5% above the variable rate and it allows them to assess your ability to repay the loan, should the Reserve Bank cash rate rise, causing a mortgage interest rate increase during the term of your loan.”
The mortgage assessment rate varies between each lender, which means that when you apply for a loan each lender will offer you a different loan amount. Added to this, lenders will use different mortgage assessment rates for each of their own loan products.
“This means that the amount the same lender can offer you will differ, depending on the home loan product you chose,” Wight says
To demonstrate this point Wight calculated the current assessment rates (as of early August) of three major lenders:
CBA           8.31% - 9.31%          
ANZ          8.75 % - 9.70%
ST George 8.45% - 9.40%
“As you can see, the difference in the assessment range within the same lender can be around 1%,” she says. Sometimes, for instance, fixed rate products can attract a lower assessment rate, because the interest is locked in for a set period, while variable rate loans are assessed towards the higher end of the scale.
Wight adds that the amount you can borrow hinges on other factors, such as how much the lender allows for minimum living expenses, what percentage of rental income or other income they will accept for the repayment servicing, and how they treat your credit card debt. “The mortgage assessment rate has a bearing on the borrowing capacity, but so too does the lenders internal lending policies,” she says.
Below is Wight’s calculation of the borrowing capacity of an applicant earning $70,000 p.a. with no other expenses, applying for a standard variable product from each of the three lenders.
CBA             $377,133
ANZ             $397,985
St George  $400,787
The difference is substantial at almost $25,000. As many would-be homeowners and investors can attest to, this could make all the difference between being approved or declined.
Let’s say the applicant were to approach St George. Upon doing so, they could find that they are approved for more or less funds if they apply for a different product (such as a fixed rate loan), because the assessment rate varies between products.
There are several factors that could impact your home loan application, from the mortgage assessment rate and interest rate through to the way the lender assesses your personal debts. For those who are in the market for a home loan, it clearly pays to contact an experienced, qualified mortgage broker who can guide you towards a lender that is most suited to your situation.

It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan

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