Australia's biggest home-loan providers are starting to adopt the proposals of the Australian Prudential Regulation Authority to ease serviceability rules for home loans.
ANZ and Westpac were the first to do so, changing their respective home-loan serviceability floor rate to 5.50% and 5.75%. Both, however, increased their buffer rates to 2.5%.
Serviceability and buffer rates are used by banks to assess the capacity of borrowers to repay their home loans should interest rates begin to rise. Buffer rates are added to current mortgage rates — for instance, borrowers applying for a home loan with a 4.5% interest rate would be assessed to see if they can repay mortgage rates of up to 7%. If the variable rate plus the buffer rate is less than the floor rate, then the serviceability floor rate will be used as the assessment rate.
Great help but still risky
Experts believe that the changes to the lending rules would be a great stepping stone for home buyers looking to break into the market. Home Loan Experts Managing Director Otto Dargan said borrowers would now be able to borrow what they could afford, increasing their chances of getting approved.
"The new assessment rates used by banks still have a significant buffer that will protect borrowers from future rate increases," he told News.com.au.
While this move could result in many home buyers getting the go-signal, RateCity research director Sally Tindal warned bank customers not to borrow more than they need and could afford.
"Sit down and work out exactly how much you can afford each month, factoring in a buffer of at least 2.5%, if not 3% above the bank's existing rate. Rates are at historic lows right now but a home loan is for 30 years — rates will rise in this time," she told News.com.au.
Still, the changes would be able to help not just the borrowers but also the lenders to stress test a client's capacity to service loans in a low interest-rate environment, Mortgage Finance Association of Australia CEO Mike Felton told News.com.au.
"This strikes the correct balance between maintaining consumer protection, allowing access to credit and ensuring an appropriate level of competition between lenders," he said.