Fuelled largely by a reduction in ‘assessment rates’ – the interest rate lenders use in their serviceability calculations, borrowing capacities for certain clients have increased 10% over the past couple of months.
Here are two examples from recent tests we’ve done for clients…
* NAB broker serviceability calculator, accessed 15 November 2020 (previous version) and 31 December 2020 (new version)
Despite actual home loan rates for many borrowers being somewhere between 1.95 – 2.75% now, up until recently many banks have been doing their borrowing capacity calculations on an assessment rate of at least 5.4% (being the higher of a 5.4% floor, or the actual variable interest rate the borrower is paying, plus a margin of 2.5%).
Only 18 months ago (up to July 2019), common industry practice was to use an assessment rate of 7.25%.
Over the past two months a number of lenders have reduced their floor/ assessment rates down to 4.95 – 5.05%.
The lower assessed loan repayments in the banks’ serviceability calculations results in higher surplus cash flow, which often has a material impact on borrowing capacity.
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It is also worth noting that the recent Federal Budget included changes to tax bands which in many instances sees increases in take-home pay. Certain banks have started incorporating these changes into their serviceability calculations too, which has the same (albeit smaller) effect.
And despite not being relevant for all borrowers, we’re starting to see greater acceptance from lenders of additional income sources like rental income and bonuses/ commissions.
These income types were being more heavily sensitised by most lenders throughout 2020 when their was more caution being exercised around Covid.
Readers can draw their own conclusions around what this all means for the relevant property markets they follow.
There are undeniably still headwinds (higher unemployment, constrained earnings for many businesses, restricted travel and lower immigration), but the above examples show how certain borrowers may soon start increasing their property budgets.
If you’re in the process of formulating a property strategy for the new year it may be well worth getting an update on your borrowing capacity across a variety of different lenders.
All lenders are at different stages of updating their policies and serviceability calculators, so having more options available is becoming increasingly important.