The Australian Prudential Regulation Authority has removed the serviceability buffer that required banks to assess all borrowers against their capacity to repay the loan at 7 per cent.

Under the new rules, banks will merely add 250 basis points to the rate paid in order to assess whether or not the loan is suitable for the borrower.

As interest rates have moved lower and lower, mainstream lenders have begun to offer fixed loans at rates as low as 2.99 per cent but borrowers were still being assessed against their ability to repay at 7 per cent or more than twice the available interest rate. Banks typically add another 25 basis points on top of the APRA hurdles.

Westpac were first to augment the change, albeit several weeks before the actual introduction and were forced to revoke it however today most mainstream lenders have introduced the change to their loan servicing guidelines making it easier for borrowers to qualify and in most instances, increasing their borrowing power.

Courtesy – Selected Comments James Frost AFR