Lenders across Australia have been forced to raise the sensitivity rate they use when assessing home loan applications.
The sensitivity rate is a buffer rate that is higher than a lender’s current interest rates for its home loan products. It factors in the potential for future interest rate rises to ensure that borrowers will still be able to meet their home loan repayments in a higher interest rate environment.
What is the change?
Lenders around Australia now have to assess a borrower’s ability to afford home loan repayments at a sensitivity rate that is at least 3% higher than their currently advertised rate on their range of home loan products. This decision by APRA was made on the 6th of October with the changes to be effective by the end of the month.
Previously, lenders were required to use a sensitivity rate that was 2.5% higher than their current home loan rates. Some institutions had also mandated a floor to their sensitivity rate that ensured the rate used for loan assessments did not go lower than a certain amount, effectively increasing the rate buffer for our current very low-interest-rate environment. This however was not required by APRA and not utilised across all lenders. Those that did not follow this practice will be most affected by the latest change.
Why has the change been made?
The higher sensitivity rate has been mandated by the Australian Prudential Regulation Authority (APRA). APRA is the regulator of Australia’s financial system and an important part of its role is ensuring that lenders in the market operate responsibly.
There has been rising concern that Australia’s current record low-interest rates have resulted in borrowers taking on massive levels of debt and fuelled surging prices in the property market over the past 12 months. The increase in the sensitivity rate is designed to dampen lending to take the heat out of the market.
APRA’s latest figures show that more than one in five new home loans written in Australia over the past 12 months have a debt-to-income ratio of more than 6. These loans are especially vulnerable to interest rate rises.
How the change affects borrowing limits
The change effectively reduces the borrowing capacity of new home loan borrowers by 5% with lenders who were using the previously mandated 2.5% sensitivity buffer, as the table below illustrates. It is important to note that different borrowing types will be affected differently, and debt sourced from a lender that had utilised a floor rate may be less affected, and in some cases not affected at all.
|Previous maximum borrowing capacity (using 2.5% sensitivity buffer)||Current maximum borrowing capacity (using 3% sensitivity buffer)||Difference|
How we can help
If you have received an indication of your borrowing power from a bank then this change may have made that advice obsolete. Our team of lending and finance professionals at Wilson Pateras in Richmond can provide you with advice on how this new sensitivity rate will affect your home loan borrowing power.
We can also help you with any other financial planning, tax, or accounting services that you or your business may need. We are a full-service accounting firm supporting individuals and businesses to achieve their financial goals.
Contact us today to find out more. We would be happy to set up an appointment to answer any questions you may have.