Updated: Sep 30, 2021
Interest rates are at an all-time low at the moment. With the Reserve Bank of Australia (RBA) attempting to stimulate our economy, the cost of borrowing from lenders is ‘low, low, low’ as Flo Rida once said. In other words, there’s never been a better time to get your foot in the door (literally) of the property market!
Low interest rates have three key benefits for potential home buyers or investors. Essentially, it means that you will be paying less interest on your debt, thus having more money to repay your debt, as well as increased borrowing power.
Although the RBA has advised that they are not expecting interest rates to vary substantially until 2024 at the earliest, with the cash rate staying at 0.1%, there is still one more variable that property buyers and investors need to be aware of in the current financial climate, and that is assessment rates.
An assessment rate, otherwise known as a floor rate, is the rate that banks and lenders use to assess your ability to repay your home loan, accounting for a potential increase in interest rates over the term of your loan. This means that, although interest rates may be at an all-time low at the moment, banks will assess your ability to repay your debt at an increased rate with a buffer percentage added on top of the current interest rates to forecast your future serviceability accurately. The Australian Prudential Regulation Authority (APRA) used to require lenders to assess home loan applications using a minimum interest rate of at least 7%, and common industry practice as of 2019 was to use a rate of 7.25%. After APRA amendments were announced in July 2019, lenders have been able to set their own minimum interest floor rate, with the buffer altered to at least 2.5% over the loans interest rate.
This means that in the current financial climate, banks have their own individual assessment rates that they do not advertise, which only increases competition in the lending market. Lucky for you – this means you can shop around with the help of a mortgage broker.