It’s been a dreary 12 months for property buyers in general. In the post-Royal Commission lending environment, many investors and homebuyers have experienced first-hand the increased scrutiny that banks are placing on loan applicants.
A number of different factors have conspired to make it harder for borrowers to access funding – but the good news is, things are looking up.
What are the changes – and how do they impact you?
To understand what this means for your home ownership or investment dreams, we need to delve into some of the finance jargon.
When you’ve tried to figure out how much money you can afford to borrow based on your income, you have perhaps used one of the many online calculators. These are a great starting point – but they often use the advertised interest rate or comparison rate when making calculations.
This means that you enter the amount of the deposit you have stashed away and, based on that along with the advertised interest rate, the calculator algorithm suggests your borrowing power is around $700,000 (for example).
So when you actually go and apply for finance, why does the bank come back with a much lower figure and put a serious downer on your plans?
The answer lies in the difference between the advertised interest rate and comparison rate, and what lenders call the “assessment rate”. That’s the interest rate they plug into their calculator when deciding how much they should loan you. Until recently lenders were required by APRA to assess borrowing power using a minimum assessment rate of 7 per cent.
In an era of record low interest rates, this measure was intended to prevent mortgage holders from getting into financial strife when rates inevitably rise in the future; a loan that is affordable today at 3.4 per cent, might put you on Struggle Street in a few years when you’re paying it back at 6 per cent, for example.
For many borrowers, whether homebuyer or potential investor, a 7 per cent assessment rate has meant that the amount of finance able to be obtained was much lower than they were expecting.
APRA has recently announced that they have changed this recommendation from the 7 per cent figure, to a more favourable 2.5 per cent above the loan’s actual interest rate.
In other words: if your new home loan is 3.4 per cent, then the bank will assess your loan application against a rate 2.5 per cent higher than this, i.e. 5.9 per cent.
Before this announcement, a couple with two children, earning a combined $160,000pa, might have approached a lender who assessed their borrowing power at 7 per cent and who would have been prepared to loan them $750,000.
Under the new recommendations, the lender would assess the loan at a rate of 5.9 per cent (assuming the loan’s actual rate is 3.4 per cent) giving the borrower up to $840,000 to play with – an increase of more than 12 per cent!
This is huge news for those seeking property finance, and will result in a significant boost to borrowing power.
When you combine this more relaxed assessment practice with the fact that property prices are recovering, despite what many doomsday experts predicted, it looks like the 2019/20 financial year could be a better one for property investors and owner occupiers alike.
Add to this the recent decision by the RBA to drop the cash rate to just 1.00 per cent, and the Liberal election win putting a stop to any fears about the abolition of negative gearing, it seems there is no time like the present to create your investing strategy and start growing your property portfolio.