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Welcome to the finance update for the week ending 4 March, 2023.
March has arrived, and summer has, on paper at least, given way to Autumn. With the change of season comes a change of tactic from CBA and NAB, both of whom made what is known as ‘out of cycle’ rate changes earlier this week, meaning, they both increased interest rates outside of the normal RBA cash rate announcement cycle. Unlike the rises both these lenders made late in February, these increases only apply to new loans with deposits of over 30% in the case of CBA, and less than 20% in the case of NAB.
In this week’s newsletter, we look at the APRA Serviceability Buffer and how it is used by lenders.
What is it?
The Australian Prudential Regulation Authority (APRA) expects lenders to apply a theoretical interest rate calculation buffer to all new home loan applications, so that when an application is assessed, the ability for a borrower to be able to repay a mortgage is measured on an interest rate that is higher than the interest rate at the time of application.
How much is the buffer and why is it used?
The buffer is currently 3%. This means that to be approved for a home loan that has a 5% interest rate, the borrower needs to be able to demonstrate their ability to repay the loan at a rate of 8%.
The buffer was introduced to ensure that borrowers have the capacity to continue to repay their home loan if interest rates should go up – which of course they have substantially over the past 12 months. In fact, the buffer amount has been surpassed during that period.
Has the buffer been effective?
As a protection mechanism, it’s hard to argue that it hasn’t been effective, however it does have a problematic downside. The restrictive nature of the buffer can stop people from being able to enter the market, even if they can afford to make loan repayments on the face value of current interest rates. Similarly, it can stifle an existing borrowers ability to refinance their loan because with the theoretical buffer loaded on, they will not qualify for a replacement loan.
If you’d like to know more about the serviceability buffer, please do not hesitate to contact our office.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
Standard Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
