Interest rates have been at record lows, the property market has had a good run and, to maintain a balance in the market, the lenders are continuing to gradually tighten their lending policies.
The latest changes have included amendments to servicing rates which may affect some borrowers and investors.
Previously, lenders have assessed a consumer’s borrowing capacity using only a small buffer in addition to the current rate. Now the lenders want to ensure that if there is a rise in interest rates, borrowers won’t be squeezed. The current lending rates are around 4% and lenders are using a servicing rate of over 7% which leaves room for a rise in rates of around 3%.
Lenders are also inflating existing loan repayments to a higher servicing rate when assessing a new loan. Previously, lenders would assess the actual repayments on an existing loan but now with these changes to serviceability calculations, it could reduce a consumer’s borrowing capacity. Interest only loans are also affected as lenders will assess these loans based on a scenario where consumers make both principle and interest payments.
For property investors, the new lending policies have had an impact on rental income. Lenders will assess rental income at a lower proportion of the actual rental being received which takes into account longer vacancy periods.
Those who earn an income from foreign countries may also be affected by the recent changes. Previously, lenders would consider 100% of foreign income and rental income. Now, lenders are assessing between 70-80% of foreign income PLUS the income earned from certain countries is no longer acceptable.
All of these changes mean that, under the same circumstances, consumers can borrow less now than they could have borrowed a year ago. These new changes are positive for consumers in that they add protection in case of a rise in rates. At 1st Street, we have always used a conservative approach to calculating loan serviceability and these changes reinforce our usual practices.
If you have any queries relating to these changes and how they may affect you specifically, please feel free to contact us.