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In the past, a lot of Australians may have missed out on their dream homes because of the way lenders assess their borrowing power and decide how big of a loan they could get. Well, the recent changes made by APRA could help you get approved for a much larger home loan so you could finally land your dream home.

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We guide you through the changes through the story of Bob - a Melbourne-based tradie.

Bob, an electrician, always dreamed of owning his own home. In May, Bob and his wife found a 4 bedroom mansion in Windsor, Melbourne. The house was perfect for their growing family and had everything they were looking for in their dream home - a beautiful and spacious front yard, maple wood flooring, a walk-in-wardrobe, the works!

After years of hard work, Bob had put away enough money for a deposit and was confident in securing his dream home. Bob marched down to his bank with all his documents in hand, hoping to get a loan of $800,000 to buy his dream family home. He explained what he wanted, and was delighted to hear reassuring responses.

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How did banks assess borrowing power previously?

What lenders think you can afford to borrow is governed largely by your credit history, income, expenses, and a mandatory assumed interest rate check given by the regulatory authority, APRA. It’s been years since this framework was substantially adjusted but a big change was made in July 2019.

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Banks consider a range of factors when assessing a home loan application - what you want to buy and how much you already have saved towards the purchase is the start. They then consider how much you earn regularly (your capacity to repay loans), what your current commitments are (i.e. what debts you have now and how much you spend on living expenses) and finally, what THEY think you can afford (it’s their view...not yours).

A couple of weeks later, Bob was left heartbroken when he found out that his application had been rejected for the loan amount he needed on account of his not-so-stable income, even though he had the standard 20% deposit of the home’s market value saved up.

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Up until May 2019, if you borrowed money, lenders had to calculate your ability to repay the loan based on an interest rate higher than the offered rate, usually around 7.25%. The higher “assessment rate” was used to check if you could still make timely repayments if the interest rate were to suddenly rise.

When a bank wanted to consider lending you more money, they also assumed that any loans you had (either new or existing) were also charged interest at a rate of 7.25%. This has now changed.

What changed in July 2019?

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Banks can now consider what THEY think the money is likely to cost you to repay in the future and use lower interest rates to assess your application. Each bank now decides for themselves what that rate is, as long as it is at least 2.5% more than the proposed interest rate (i.e the offered rate + a maximum of 2.5%).

This means that when assessing an application, most lenders now calculate a borrower’s ability to repay their loan based on a lower interest rate - reduced from around 8% to around 6%. This can ultimately increase your borrowing capacity.

Months later, in July, Bob hears about Lendi and calls one of their helpful and understanding Home Loan Specialists to discuss his dream.

When the Lendi Home loan Specialist informed Bob that this change could potentially increase his borrowing capacity by over 20% and get him that extra $100k - $125k he needed to land his dream home.

Bob felt a sense of satisfaction that no amount of cold frothy beers with the boys after a long, tiring day at work could produce. Bob and his family are now in the process of moving into their dream house and finally making it a HOME.

Wondering how much you could borrow?

Calculate your borrowing power based on your income.

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Once banks assess everything else, including your credit history, savings etc. it all comes down to the assessment interest rate and any reduction in this rate will directly increase your borrowing power.

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Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here.

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

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Tags: investment property, investment, investment return, apra, interest, interest adjustment, interest rate, borrowing power, new purchase, first home buyer

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Check today's low rates

Tell us what you are looking for and see if you can save.

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856, Credit Representative 518849), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of lenders including ClickLoans, a related body corporate of Auscred Services. Although Lendi compares over 1600 products from over 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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