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What the recent RBA rate cuts and APRA lending reforms mean for your home loan

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It’s been a busy few weeks for the mortgage industry with a lot of changes for borrowers coming into effect. We’ve broken down the big changes in detail here.

What changes have been announced?

Consecutive RBA cash rate cuts

In the past two months, the long rumoured cash rate cuts courtesy of the Reserve Bank of Australia (RBA) finally transpired, now leaving the Australian cash rate resting at a historic low of 1.00%.

This interest rate drop of 50 basis points over the two cuts was primarily motivated by stagnant wage growth and the recent downturn in property values in a bid to help boost inflation.

Lower home loan interest rates

There really is no downside with this change. Within days of the consecutive rate cut announcements, dozens of lenders passed on the cut (partially, or in full) to customers resulting in lower home loan repayments.

Many Aussies could save $1,200, or more, over the next 12 months. The recent 50 basis point reduction, if applied directly and in full, could save the average Australian mortgage holder with a $380,000 loan, an incremental $1,200* in interest per year. If your lender has not passed on this cut, it’s worth reviewing your options to see if there are savings to be made that can help put you in a financially stronger position.

Check out our list of which banks and lenders have already passed on the 0.50% RBA cash rate cut.

APRA lending reforms

Previously, an individual’s borrowing power was assessed against their ability to repay a loan at a much higher interest rate. This month, APRA, the Australian Prudential Regulatory Authority, confirmed it will proceed with its plans to remove the 7 percent interest floor for mortgage serviceability assessments.

APRA originally introduced serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards and limit the potential for mortgage stress.

Borrowers can potentially borrow more

For Aussie homebuyers, APRA’s lending reforms could boost your borrowing capacity and you’ll likely be able to borrow more funds to buy a home.

Previously, lenders needed to apply a ‘stress test’ on each home loan application, to see if borrowers could afford to repay a home loan with an interest rate of at least 7.00%, but more often closer to 7.25%.

APRA’s relaxation of these lending restrictions means lenders can now assess borrowing capacity on a lower rate, ultimately boosting borrowing power.

For a borrower on a rate of say 3.25%, the change would mean lenders could now assess their ability to repay their home loan at 5.75% (that’s 3.25% + 2.5%), instead of a minimum 7.00% or 7.25%.

Budgets boosted in a month:

  • In June 2019, a single Australian buyer earning $85,000 p.a. could borrow $538,949, today they could borrow $627,278^. A significant increase of 16.39%.
  • In June 2019, a couple with one child and a household income of $150,000 could borrow $813,340, today they could borrow $946,640^. A significant increase of 16.39%.

Lending policy reforms to date

So far, the major lenders who have revised their interest rate floor include:

  • Westpac Group (including Bank of Melbourne, BankSA, and St George Bank) cut its interest rate floor from 7.25% to 5.75%.
  • ANZ cut its interest rate floor to 5.5%.
  • Commonwealth Bank has lowered its interest rate floor from 7.25% to 5.75%.
  • NAB has cut its interest rate floor to 5.5%.
  • Suncorp Bank cut its interest rate floor from 7.25% to 5.50%.
  • Macquarie Bank reduced its interest rate floor from 7.25% to 5.30%.
  • Bendigo and Adelaide Bank have dropped their interest rate floor to 5.75%.
  • Bank of Sydney has lowered its floor rate to 5.85%.
  • Bankwest cut their interest rate floor to 5.30%.
  • Bank of Queensland and Virgin Money reduced their interest rate floor from from 7.25% to 5.65%.

Last updated Wednesday 31 July, 2019.

Borrower beware!

While it may be easier to qualify for a larger loan with a lower interest rate, you can still expect lenders to apply the same level of scrutiny to your income and expenses. Lenders now have a lot more data available to them to make decisions about the creditworthiness of borrowers.

Being able to borrow more funds doesn’t mean that you should do it. Yes, while these changes can increase your buying budget, it also means you are increasing your debt. The more you borrow, the more you increase your risk of mortgage stress defaulting in the future should your income decrease or the value of your property drop.

Got a home loan question? Just ask!

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*repayment rate based on a $380,000, P&I loan over a 20-year term decreasing from 4.25%/4.25% to 3.75%/3.75%.

^calculation based on an applicant in permanent employment (not on probation), with a 20% deposit and good credit rating.

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.

Tags: rba cash rate, reserve bank, interest rate, refinance, new purchase, apra

Check today's low rates

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Check today's low rates

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