APRA’s decision to remove the 7 per cent floor on home loan serviceability assessments will help take the brakes off Australia’s home loan credit crunch.
Previously, APRA made banks check whether home loan applicants could pay their mortgage at a rate of at least 7 per cent.
Most banks applied a minimum rate of 7.25 per cent.
From last Friday, banks can set their own serviceability minimums, provided they also apply a 2.5 per cent buffer on the current interest rate when assessing an application.
For many Australians the move is likely to significantly boost their borrowing power by tens of thousands of dollars.
RateCity.com.au analysis shows a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25 per cent instead of 7.25 per cent.
The average single person would be able to borrow up to around $50,000 more under the same scenario.
RateCity.com.au research director Sally Tindall said:
“This change from APRA will increase people’s borrowing power overnight.
Many Australians may suddenly find they can get their home loan approved, however, with more buyers in the market, house prices could also take-off again.
Australia is in a very different home lending landscape than when the 7 per cent buffer was made in 2014.
It was time to re-assess what has become an out-of-date interest rate floor, especially on the back of two RBA rate cuts.
APRA has eased off the brakes slightly, but that doesn’t mean it will be a complete field day for borrowers.
There are still a number of checks and balances in place to make sure people aren’t jumping into home loans they can’t afford to repay.
APRA is also allowing banks to set more than one interest rate floor, acknowledging that lenders often charge lower rates for some loan types, such as owner occupiers."
Estimate of home loan borrowing capacity under new rules
Scenario 1: single income ($83,455)
| Serviceability rate | Estimated borrowing amount | Potential increase in borrowing power |
| 7.25% - current | $478,000 | |
| 6.50% | $516,000 | $38,000 |
| 6.25% | $529,000 | $51,000 |
| 6.00% | $544,000 | $66,000 |
Scenario 2: family of four (household income $109,688)
| Serviceability rate | Estimated borrowing amount | Potential increase in borrowing power |
| 7.25% - current | $559,000 | |
| 6.50% | $603,000 | $44,000 |
| 6.25% | $619,000 | $60,000 |
| 6.00% | $636,000 | $77,000 |
Assumptions: Average household income data according to ABS Census 2015/2016. Assumes one parent earning 30% of $109,688 and the other 70%. Assumes monthly household expenses of $3500.
Single income figure from ABS Average Weekly earnings Nov 2018, Full-time adult average weekly ordinary time earnings. Assumes monthly expenses of $2000
