APRA Serviceability Rate Change

As the property market continues to boom unabated, APRA (Australian Prudential Regulation Authority) has announced a change in the serviceability rate for borrowers with the objective of slowing the ongoing property price surge. Here is a quick look at what this means and how it will impact the amount you can borrow.

What is the serviceability rate?

Serviceability rate is nothing but the interest rate at which a lender tests or assesses your ability to make repayments. This rate is usually 1-2% higher than the interest rate your home loan settles at.

What is the rationale behind a serviceability rate?

Having a buffer between the home loan interest rate and the rate at which a home loan settles provides borrowers with room to make larger repayments should there be an increase in interest rates. The serviceability rate is also, therefore, a means to control the amount a loan applicant can borrow. As per APRA’s June 2021 report, over 21% of borrowers borrowed over six times their income. This increased amount of debt level is considered unfavourable for households as well as the heating property market.

APRA Proposed changes in serviceability rate

APRA has advised lenders to increase the serviceability rate buffer from 2.5% to 3% over the loan settlement rate. Let’s delve into this a little deeper with an example. Let’s say your lender has a home loan rate of 3%. Before APRA’s new serviceability rate change proposal, your lender would check your ability to make repayments against a rate of 4.5%. With this new serviceability rate, your lender will now assess your repayment ability against a rate of 5% instead of 4.5%.

How will this impact you as a borrower?

1. For existing borrowers: If you are an existing borrower, this change will have no impact on the current terms of your home loan or repayment size.
2. For prospective borrowers: You will now be able to borrow slightly lesser than what you previously could. A 0.5% increase in the serviceability rate would imply that a borrower that could earlier borrow $1,000,0000 will now be able to borrow $950,000 instead.

What could prospective borrowers consider doing?

1. If you cannot afford the property you’ve been looking to buy because of a smaller amount you can borrow, consider opting for a different lender or home loan product. For example, a fixed rate product with a lower rate could allow you to borrow the amount you need to purchase the property you have zeroed in on.
2. If you are keen on the type of home loan you’ve selected, you may have to start looking for a different property to match the amount you can borrow.
3. Either way, whether you switch home loan products or choose a different property, it is best not to postpone your property purchase if you are financially secure and ready for the financial commitment.

The easiest approach to deciding the next steps best is to rely on the guidance of a mortgage broker. Mortgage brokers receive a commission from the lender when they settle a home loan and their services are usually free for borrowers. Not only will a broker scope the market to find you the right home loan but it will also manage your loan paperwork.

Reach us for the best way forward as per your circumstances.