Banks increasing “buffers” used to assess mortgage affordability
Banks increasing “buffers” used to assess mortgage affordability; Banks will not approve loan unless borrower proves they can handle 2% interest rate rise
Tweet Topic Started: 24 Sep 2013, 11:35 AM (886 Views)
Banks are increasing the “buffers” they use to assess whether home buyers can afford to take out a mortgage, amid concerns that some borrowers may not be able meet repayments when Australia’s record-low interest rates start to rise.
The tougher loan criteria have been put in place over the past few months after the Reserve Bank of Australia cut official interest rates in May and August, taking the official cash rate to just 2.5 per cent. It comes as financial regulators put pressure on banks to not lower their lending standards while interest rates are down and amid calls for tighter credit restrictions to prevent a house price bubble.
“Interest rates are at historic lows and at some point . . . they are going to start going up and at that point you want to be confident that those loans are going to be serviceable at higher interest rates,” Australian Bankers’ Association chief executive Steven Münchenberg said.
“Banks always put an interest rate buffer in when they look at whether you can afford a home loan. I understand they have increased that buffer recognising that rates are particularly low.”
Banks use an interest rate “buffer” above their current home loan rates to test whether prospective borrowers will be able to afford repayments in the future. While lenders are reluctant to disclose the exact criteria they use to assess loan applications, senior sources within the banks have confirmed that a 2 per cent buffer has become typical after the RBA’s latest rate cuts.
The test for borrowers has changed significantly from last year, when buffers of between 1.25 per cent and 1.5 per cent were usually applied.
The stricter criteria mean that if a bank has a mortgage interest rate of 5.5 per cent, it will not approve a loan unless a borrower can prove they can afford to make repayments when rates go up to 7.5 per cent. Some banks are also introducing interest rate “floors” in their assessment criteria so that they will continue to assess loan applications against higher rates even if the RBA cuts rates again.
“With the RBA’s last cut in August, it crystallised in people’s minds that rates are getting low,” a senior bank executive said.
With interest rates at record lows, banks have been issued with a number of high-powered warnings against lowering their lending standards to win customers. RBA calls for prudent lending
The RBA cautioned last week that “it was especially important that banks maintained prudent lending standards” given “the current environment of low interest rates and slow credit growth”.
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