19 Jul Does the APRA change mean anything to you?

Banks stress test your ability to make repayments at a rate above the actual interest rate to ensure you can still afford your loan if and when interest rates increase.  A floor rate is the minimum rate the banks can use to stress test your ability to make repayments if and when interest rates increase.

APRA recently announced that they are removing the 7.25% floor rate that lenders are required to use when assessing how much you can borrow. An example of this would be that even if your interest rate is 2%, the bank would still assess your loan application as if the interest rate was 7.25%.

What’s changed?
The banks now have the choice to set their own interest rates, however, it must be at least 2.50% above the actual interest rate. Most banks have adopted this change and have reduced their rate in which they now stress test your ability to make repayments.

What does this mean for you?
You might be able to borrow more money from the bank. The interest rate used to stress test the application has now become more appropriate to the current interest rate climate after the recent RBA rate reductions.
So if you were told that you could only borrow a certain amount before and it restricted your plans, you should check how much you can borrow now with these current changes. Each bank’s stress testing rate is different, so it’s important to do your research to see how much you can borrow with different lenders, as you might be pleasantly surprised that you could borrow more with another lender. Some banks use the minimum required and others use a higher interest rate, this is the reason why you could borrow more with some lenders and less with others.

As always, we don’t only rely on the bank’s calculators to see how much you can borrow, we always do our own stress testing by exploring different repayments amounts, putting aside the actual repayments into savings even before applying for the loan and calculating actual repayments after-tax benefits are applied for investment properties.

Of course, if you’d like us to check if you can borrow more now, we’d be more than happy to help.

“Life consists not in holding good cards but in playing those you hold well.” –  Josh Billings

Thank you for reading,