Inside the mortgage industry there has been a lot of excitement about the changes in how loan serviceability works. In theory, it should make loans more accessible to everyone.
Unfortunately it hasn’t really beneﬁtted everyone equally. The real winners are home buyers, and home owners who are looking to upgrade. Unfortunately our core market at Clever Finance Solutions – investors haven’t really gotten as much out it. Here’s why…
Every time anyone applies for a home loan, the lender is required to check they can aﬀord to pay the loan back. This is called serviceability. The bank needed to show the borrower can aﬀord to pay back their loan at a minimum 7.2% or the actual interest rate plus 2.25% over the P&I repayment term (generally 30 years) to pass their serviceability test. Now we haven’t had an interest rate that high since the Global Financial Crisis. So to say it is a bit high is an understatement.
The recent change is, that serviceability test is now tested at a minimum of 5.5% or actual interest rate plus 2.5%. The idea being that if there is a sudden spike in interest rates a borrower won’t have to immediately sell because their home is suddenly unaﬀordable.
Because investors are paying higher interest rates than owner- occupiers the new serviceability test means investors assessed at 2.5% above the going 4.5% interest rates – about 7%. While owner occupiers are being assessed at less than 6% rather than 7.2%. That’s why it helps owner-occupiers more than investors.
But if you can spot a good deal this will make it a little bit easier to buy that next property.
For any ﬁrst home buyers or anyone you know that is looking at buying their own home, this change in serviceability is big news.
Lenders started changing their serviceability tests in July. Anyone that applied before will have been tested under the old system. This change will really help someone looking to buy their own home, or upgrade as it means they have more lending opinions now than they did a couple of months ago and can possibly borrow more.