First – some background. Banks have always assessed loans at an “affordability” or “assessment” rate. This rate ensures that borrowers aren’t instantly put hardship with any upward rate rise. There are two components to the servicing buffer – floor rate and the serviceability buffer. Floor rate The floor rate is the minimum interest rate that…
First – some background.
Banks have always assessed loans at an “affordability” or “assessment” rate. This rate ensures that borrowers aren’t instantly put hardship with any upward rate rise. There are two components to the servicing buffer – floor rate and the serviceability buffer.
Floor rate
The floor rate is the minimum interest rate that banks can use to assess home loans. This is currently at 5% – most banks have set higher than minimum floor rates – 5.1% / 5.25% etc. This means that if your actual home loan rate will be 2.2% then your ability to repay the loan will be assessed at a minimum of 5%.
Enter – serviceability buffer
This is the rate which APRA has just increased from 2.5% to 3%. This is the buffer which is added to the product interest rate to determine whether the floor rate or higher rate applies to the assessment.Using the figures above, if your product is 2.2% – the current serviceability would be the floor rate. 2.2 + 2.5 = 4.7%. As this is less than 5% – the floor rate applies. Under the increased buffer your assessment rate would be 2.2 + 3 = 5.2%.Depending on the bank – there may not be any change to your borrowing capacity. If the bank has set a floor rate of 5.25% – then the assessment rate at 2.5% buffer and 3% would both be 5.25%. Of course, this increase will impact borrowers who are home loan products with higher rates which includes investors, higher LVR borrowers and credit impaired clients. Overall, in the current environment the increased buffer will only have a minimal impact, however, as rates begin to increase the impact will bite harder and harder.
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