It’s all off the back of talks the treasurer has had with the regulators concerning the rapid growth in the housing sector. The key proposed change relates to something called ‘Assessment Rate’. This is the interest rate that the bank uses to test a borrower’s ability to continue making repayments if interest rates rise in the future. (And how the banks assess how much they will lend you).
Currently, there are two main metrics which make up an assessment rate. The first being enforced by the regulator, being a minimum loading on top of the actual rate of currently 2.50%. I.E if the actual interest rate was 2.30%, the assessment rate is 2.30% + 2.50% = 4.80%. Most banks / non-banks then have a floor assessment rate, which is a minimum assessment rate regardless of the above calculation. This is generally between 5.00% – 5.50%. Using the above example, the bank would be using the floor rate of 5.00% – 5.50%.
The proposed change which looks like it will be implemented some time in the next month or so, is a direction by APRA to increase the minimum loading from 2.50% to 3.00%. Therefore, using the above example, this makes the assessment rate 5.30%. This change will mainly affect investors whose interest rates are generally higher which appears to be the target of this change. I did some modelling of my own and it works out to be a maximum reduction of 4% to borrowing capacity.
However, if you have a low owner-occupied interest rate, you may not be affected at all as a 3% loading still may not exceed the floor rate being used.
Written by Tom Morison