The banking landscape changed significantly last year. If you are looking to borrow in 2017 it is important to know how the changes might affect you.
Many people don’t know that banks don’t assess loans on the interest rate you will be paying. They assess your loan repayments at a higher rate known as the assessment rate.
This puts a buffer on the repayments. The buffer helps ensure borrowers can afford the repayments if interest rates increase.
In the past many lenders had their assessment rates at 2% higher than their current rates on offer. With home loan interest rates below 4% this meant they were assessing loans as if you were paying 6%. Due to government pressures most lenders are assessing home loans at a rate of 7.25%.
This extra 1.25% has a large impact on your borrowing capacity. For many it will mean they can borrow much less than before. For others, they may not be able to borrow at all.
The buffered interest rate doesn’t just apply to new loans. It also applies to any existing debt repayments.
In 2015 many lenders would take the actual repayments on other home loans. Especially if they were with a different lendder. Now banks are applying a similar buffered rate policy to existing loans. They do this by calculating loan repayments over the remaining Principal & Interest term.
For first home buyers this has no effect. But, for investors, particularly those with large portfolios it can prohibit future borrowings.
The interest rate you used to receive with most mainstream lenders was based on two factors:
These factors are still important. But higher rates are now being applied in certain circumstances. Interest rates for investors are generally at least 0.25% higher with most lenders. Recently lenders are also applying a higher rate to loans with Interest Only repayments.
This has the effect of making your repayments more expensive. For the most part this only applies to investors but will also affect those living in their home.
Increased restrictions now apply to adding mortgage insurance on top of your loan. Many lenders offered loans with a 5% deposit allowing you to add at least part of the mortgage insurance on top. Now most lenders are restricting the adding on of mortgage insurance.
This has the effect of borrowers requiring a larger deposit before entering the market. This change has a large effect on many first home buyers struggling to get into the market.
If you’re confused about how these changes affect you consider getting in touch. We can provide you with a free assessment of your situation. This will give you comfort in how much you can borrow when buying a property.