The Real Estate Institute of Queensland (REIQ) welcomes news that the Australian Prudential Regulation Authority (APRA) is proposing removing the quantitative guidance on the level of the serviceability floor rate, allowing lenders to set their own floor rate.
At the moment, APRA requires lenders to assess a borrower’s serviceability at 7 per cent (some lenders use 7.25 per cent), or 2 per cent above the borrower’s rate (whichever is higher), a buffer designed to ensure borrowers could continue to service the mortgage should interest rates rise.
APRA is also proposing to increase the expected level of the serviceability buffer from 2 per cent to 2.5 per cent above the rate the borrower pays.
Pressure has been mounting recently, with experts and commentators suggesting 7 per cent was unreasonably high as actual mortgage rates continued to fall.
REIQ CEO Antonia Mercorella said this could mean a significant difference for many first home buyers trying to get into the market.
“We know that buyers are trying to get into the market but have been falling short of the 7 per cent or 7.25 per cent serviceability rate set by APRA and enforced by lenders,” she said.
“The consistent feedback we have received from our agents is that there has been a rising number of contracts falling over at the finance stage and we know this is largely down to serviceability assessments.
“This is a wise and prudent move from APRA and the real estate industry welcomes this sensible, measured approach.”
With many home loans now set at a rate of around 3.9 per cent, having such a high benchmark for serviceability – at more than 7 per cent – was considered by financial experts to be unreasonably high. It would take several rate rises over several years to get close to 7 per cent and in the current climate – with a further rate cut widely tipped next month – this is increasingly unlikely.
“The REIQ supports this sensible approach. Banks will continue to assess risk appropriately and responsibly. This measure will simply free lenders up to lend responsibly to more borrowers who are keen to use property to build their personal wealth,” Ms Mercorella said.
“In the post-Inquiry climate, the perception in the community is that it’s very difficult to borrow for a property. This proposed change will give lenders an opportunity to reassess lending assessment criteria and, potentially, give more loans.
“Just as the real estate market benefits from greater confidence, so, too, does the finance sector and it’s crucial that banks work to re-build that trust,” Ms Mercorella said.