The assessment rate changes Q&A.

Oct 18

There has been a lot of questions about the assessment rate changes and how it will affect borrowers and lending. Here are my thoughts.

As of last week, the bank’s interest rate buffers have started to increase in line with the changes that APRA (the Australian Prudential Regulation Authority) have introduced to cool credit growth around the country and to protect borrowers against the risk of rates increasing in time.

To summarise what this means in basic terms, we had to allow at least 2.5% above the interest rate to show our clients could afford the loan under the “stress test” and now that has increased to 3%. The lenders are staggering this, and some are allowing pre-approvals to be honoured under the old policy.

I have received many calls from concerned first home buyers, currently saving their money in preparation to buy, on savings plans, asking if this will have a negative impact on their home buying journey. The reality for the majority of first home buyers is that they are borrowing far less than they can on the bank’s calculators and the main factor in their ability to borrow is deposit. There are no changes to the size of deposits that are required and several lenders are still lending up to 95% with Lenders Mortgage Insurance and up to 85% with no Lenders Mortgage Insurance payable for first home buyers. First home buyers using a parental guarantee will not be impacted other than borrowing capacity and it has been several years since I have seen a borrower borrow their maximum utilising a parental guarantee.

Where I am seeing the most impact is our multiple investor clients. As the buffer of 3% is added to all lending, including owner occupied and all investment lending, the ability to hold extra debt is greatly impacted for these clients.

In my opinion this is an intentional move to slow the market. Having watched the property prices surge in the last 12 months the lever APRA is using to slow the market is the amount someone can borrow. This is preferable to most than increasing mortgage rates, which could have catastrophic impact to mortgage holders.

The questions I am being asked are answered below:

1) Will it be harder for first home buyers to borrow?

A – Your borrowing capacity may be less, however, the vast majority of first home buyers do not borrow at their maximum. Many clients in our portfolio borrow hundreds of thousands less than their maximum and their main struggle is what their deposit will allow. In our entire portfolio of pre-approvals there are a small handful of clients that may have to reduce their expectations slightly.

2) Will the market drop with these changes?

A – Obviously no one can predict the market and I am not qualified to answer the above. In my opinion, a lever is being pulled to slow further growth. Slowing further growth is very different to property prices reducing. If anything, this may benefit first home buyers as investors will find it harder to borrow and add to their portfolio. Less competition is something that a lot of our first home buyer Clients will welcome.

3) Does this mean rates are going up?

A- There is no link between this change and rates going up. Rates may go up and this many happen with time. The fixed rates are well below the variable rates and fixed rates have increased in the past few weeks, but they are still well below the variable. This is an indicator of where the banks believe rates may move to in the coming years. With the 3-year fixed rate still being “low 2’s”, I can’t see that the economists working for the banks are expecting the banks to lose money on these rates being set. I do not believe it is time to panic about rate rises, however, I always believe that people should do their sums on the rates now as well as the rates at a few percent higher to see if they are comfortable with their mortgage size with the fluctuation of rates. Rates are very low currently and we should always be aware of that and plan accordingly.

4) Why are investors being penalised? We can afford so much more than we have now and now the banks are telling us we cannot have another investment property?

A- This question I have answered many times in the last week. Yes, it’s tough for us investors. I bought a property last month pre-empting this change and know this will probably be my last for a while as the buffering across my entire portfolio is making it tough for me as well. This is the intent of the policy change. There needs to be some people who find it harder for the slowing of the market growth to happen. With rates as low as they are, if this change did not happen, investors may just keep buying at the same rate and this causes a flow on effect to the entire market. Rates have been low for a very long time, and a large percentage of investors have not experienced higher rates and having to contribute much more to each property. This change is also to protect borrowers. It is also important to remember that the banks want to lend you money, however, they are following the rules. If the banks do not use the higher assessment rate, they can be financially penalised.

5) Are all banks putting the assessment rates up?

A- For now, it only applies to lenders that accept public deposits. There are a number of differences we are seeing between lenders and how they are applying the changes. If you have a pre-approval, you should check your bank will honour it. Do not wait until you find a property to check this. Always check with a mortgage broker who can look at all the options for you.

I hope this helps answering some of your questions. Please reach out to the team if we can answer any questions.

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