The banking royal commission, the RBA drop in cash rate and the recent reduction in the serviceability rate from APRA. It's all happening in 2019. But what is actually going on?
Well here's a simple rundown to let you know the basics of the new changes.
Anyone who has been dealing with us over the past 2 years knows that we have been predicting the RBA cash rate to drop from the record low of 1.5%. Much to the disbelief of many clients, the media and some so called industry professionals, the RBA dropped the cash rate 0.25% basis points on the 4th of June this year. Then again on the 2nd of July they dropped another 0.25% to a new record low of 1%. But what does that mean?
The RBA Official Cash Rate is the rate of interest banks charge each other on overnight loans. Banks lend money to other banks each day to manage daily cash needs. The cash rate is generally the lowest interest rate at which banks borrow from each other and it serves as a benchmark rate in the country. The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.
"When the RBA raises the cash rate, generally it's because they want to put the brakes on demand growth and the rate of inflation. Higher interest rates tend to act as a restraint on lending growth, which has a negative impact on demand and inflation. If the cash rate falls, the RBA is trying to boost economic activity and inflation by encouraging consumer spending and business investment - lower interest rates encourage business and households to borrow rather than save which lifts economic growth" says Gareth Aird, senior economist at Commonwealth Bank.
When the Sydney market was at its peak in 2017 and prices were increasing faster than wages, the banking authorities had to step in to make a change. The royal commission into banking practices came into fruition and that was the start to the tight lending restrictions APRA imposed for all. This played out to be the beginning of the downturn in Sydney. We knew it was coming and we are glad it happened.
Now the rest of Australia is playing catch up.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. They tightened up the rules on lending during the peak of the Sydney property cycle and just recently have made a major change which means the majority of Australians can increase their borrowing capacity.
July 2019 Increase in Borrowing Power
When a customer applies for a home loan, the banks use a serviceability rate to work out repayments on the amount being borrowed. The bank then makes a decision about whether or not the applicant would have the capacity to cover those repayments, and then either approves or denies the application accordingly.
APRA had previously set the bench mark at a minimum serviceability of 7% (most lenders were 7.25%). Meaning, the banks would assess if you could afford the repayments on the loan at an interest rate of 7%.
Last month, APRA removed that 7% limit and have now recommended a "buffer rate" of only 2.5% on top of the lenders rate. Therefore, if your interest rate is 3%, they will assess if you can afford the loan based on a rate of 5.5%.
As of last week, ANZ, Commonwealth Bank, Westpac and NAB have all now moved to the new buffer rate. What this means for investors and homeowners, is that more people can now get access to lending and if you already could service a loan, it now means your borrowing capacity could be a lot higher.
“ANZ recently published some data highlighting that serviceability floor changes were responsible for approximately 30% of the tightening in lending standards and reduced borrowing capacities. So it is certainly having a material impact,” CoreLogic senior research analyst Cameron Kusher. This doesn't necessarily mean it's easier now than ever before to get a loan, but it does instill confidence in the market.
It's important to note that different banks can have varied policies and serviceability rates, which means that approval from some lenders could be more difficult than others. That's why it always pays to have a good mortgage broker working on your side to help get the best lender to suit you.
If you have any questions regarding changes in property lending, please don't hesitate to contact us - contact@thepropertyroom.com.au
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