Here’s another valuable lesson I learned from Wealth Retreat, I bet you wish you were here?
I was lucky enough to listen to Finance Strategist Andrew Mirams discuss the current financial environment and what an interesting few years it has been.
I would probably argue that finance has gradually become tighter and tighter over the decade since the Global Financial crisis in 2018/19.
The Australian Prudential Regulation Authority (APRA) has been responsible for regulating the banks on everything from interest only loans, to superannuation.
But perhaps the biggest regulation has been the serviceability requirements put on the Banks.
You may not be aware that when you are applying for a loan on a property, although the banks rate may be anywhere form 4% - 5%, that bank will most likely be assessing your serviceability at 7.25% plus!
And this has led to Credit Growth for Housing in Australia taking a dive, particularly for investors.
Rate Cuts
Like most leading Economists, Andrew was suggesting that there will be potentially two further rate cuts this year.
The next is most likely to be around July or August, with a potential second cut towards the back end of the year.
Two further cuts would likely take the cash rate below an unprecedented 1%.
This may be good news for owners and investors already in the market, but for those on the outer looking to get in it does not really mean much at this stage.
Why?
Because at this point in time, your serviceability is still being assessed at an interest rate circa 7.25%!
In some cases, this may be around 3.5% - 4% above a standard bank rate.
APRA
The tide may be slowly turning however, with APRA announcing in late May they were set to review this serviceability requirement.
For the first time in a long time, it signalled a potential loosening of their credit policy.
By lowering and unlocking this 7.25% floor, it will enable home buyers and investor to borrow more.
All eyes remain on APRA as they meet to look at options here.
Only then will these rate cuts, start to come into play for anyone looking to buy or invest in the short term.
Here is some more from my discussion with Andrew;
Conclusion
While credit has gradually gotten tighter and tighter over the last decade, there is a sign that the tide may be turning.
APRA has announced a review of its serviceability requirements that banks have been using.
While there has been a rate cut recently and potentially more to come, some borrowers are still not able to benefit until the serviceability requirements are loosened.
So for many home owners and investors, an interest rate cut may be good news.
However, for many borrowers it is not as positive until such a time APRA move to unlock the shackles that will allow them to boost their capacity and potentially enter the market.
Over to you APRA.
