APRA to change home loan assessment guidelines, but is it for the best?

By Ceyda Erem · · 3 min read
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The Australian Prudential Regulation Authority (APRA) has made a proposal to adjust current serviceability assessments banks perform when sorting through prospective home loan borrowers.

When applying for a home loan, APRA expected banks to perform assessments to gauge whether a borrower would be able to meet their repayments if interest rates were higher than they are now - this was done by using a minimum interest rate of at least 7.00%, many banks currently use a rate of 7.25%.

Under the proposal, banks would be able to set their own minimum interest rate floor in serviceability assessments.

The regulatory body first introduced the assessment in December 2014 as an attempt to encourage responsible lending standards and limit excessive borrowing during a time when interest rates were low and household debt was high.

But while those issues may still be around, APRA Chair, Wayne Byres, explained that other changes in the property market led to the proposed removal.

“Although many of those risk factors remain - high prices, low interest rates, high household debt, and subdued income growth - two more recent developments have led us to review the appropriateness of the interest rate floor,” he said.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases - possibly unnecessarily so.”

“In addition, the introduction of differential pricing in recent years - with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other - has meant that the merits of a single floor rate across all products have been substantially reduced.”

A step in the right (or wrong) direction

Should the changes go ahead, Byres believes it would provide banks with greater flexibility when assessing potential customers as well as maintain an appropriate measure to determine a borrower's ability to meet monthly repayments.

However, Mozo’s Product Data Manager, Peter Marshall has expressed hesitancy toward APRA’s proposal.

“The serviceability assessment of 7% has always been recommended as a guide to banks when assessing home loan applications, which is probably a higher hurdle than required,” he said.

“Lowering this rate is a good idea, but I don’t think it’s an appropriate decision to put into play right now - it could be better to implement in a year once the property market subsides and stays steady.”

Marshall went on to explain his fears about borrowers biting off more than they can chew and that Aussie customers should be doing their homework thoroughly before heading to the bank.

“There’s been a lot of effort put into reigning in excessive lending and while this proposed change hasn’t yet come into effect, if it does, it may prompt buyers to borrow more and while that might be fine now you never know what the future holds,” he explained.

“Borrowers need to think seriously about what they’re getting into - you need to know whether you’re able to keep up with your repayments if rates rose or if your circumstances changed.”

If you’re a homeowner, find out if your budget could handle a rate rise by taking our home loan rate change calculator for a spin. Or if you’re ready to take the plunge and buy your first home, head on over to our home loan comparison tool.

Home loan comparisons on Mozo

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Last updated 27 July 2024 Important disclosures and comparison rate warning*

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    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

  • Special Real Deal Home Loan

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    Refinancers or first home buyers pay no monthly or annual fees. Up to $3,000 cashback when you complete your home loan application online. $2,000 cashback on loans ≥$250K; or $3,000 cashback on loans ≥$500K. LVR ≤80%. T&Cs and credit criteria apply.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
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    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

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    Variable
    Comparison rate
    6.02 % p.a.
    Initial monthly repayment
    $2,995
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    BCU Bank’s OMG owner occupied home loan offers a variety of great low rates depending on your deposit. Save with no ongoing annual fees. Access your extra payments when you need to through the redraw facility. Pre-approval valid for 3 months.

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    • Owner Occupier
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    Initial monthly repayment
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    Get online approval from the award-winning Bendigo Bank Express Home Loan. Multiple offset accounts and redraw available. 100% offset on variable rate loans and partial offset on fixed rate. Flexible repayment options. New home loans only.

  • Neat Home Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <60%
    Interest rate
    6.09 % p.a.
    Variable
    Comparison rate
    6.11 % p.a.
    Initial monthly repayment
    $3,027
    Go to site

    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

  • Special Real Deal Home Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.09 % p.a.
    Variable
    Comparison rate
    6.13 % p.a.
    Initial monthly repayment
    $3,027
    Go to site

    Refinancers or first home buyers pay no monthly or annual fees. Up to $3,000 cashback when you complete your home loan application online. $2,000 cashback on loans ≥$250K; or $3,000 cashback on loans ≥$500K. LVR ≤80%. T&Cs and credit criteria apply.

  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
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    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

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    Initial monthly repayment
    $3,043
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    Competitive variable rate. Multiple offset accounts available. Borrowers can also make extra repayments. Redraw facility available. Simple online application process. 40% deposit required.

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    6.14 % p.a.
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    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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