In late May, we advised you of a review by APRA (Australian Prudential Regulation Authority) regarding lowering the interest rate buffer for residential mortgage lending; well, last Friday (July 5), they confirmed they will remove the 7% buffer taking effect immediately.
What does this mean?
It means the changes to the rates banks use for serviceability assessments; whereby they had been applying a minimum rate of 7.25% as an industry standard, despite the fact interest rates have been well below that for some time, and still decreasing. This measure was originally put in place in December 2014, at the height of the residential boom to reinforce lending standards.
The lenders can now set their own serviceability minimums, as long as they apply a 2.5% buffer over the loan’s interest rate. The change occurred the same week the RBA cut cash rates to 1 percent, and in conjunction with the federal government’s tax cut package aiming to stimulate the economy.
The bottom line is it will increase the capacity and amount borrowers can lend; benefitting not just entry level buyers, but also homeowners refinancing or upsizing.