Much has changed over the past 6 months with the govt via APRA allowing banks to reduce the qualifying interest rate by approx 2% for servicing calculations. When lenders check you capacity to repay a loan, they would use a home loan interest rate of approx 7.25% to 8%. If you could afford your new loan at about double the actual home loan interest rate, then you PASS and the lender will then check everything else for qualification. The reason for a high qualification rate is that if interest rates were to RISE over the next few years, clients need to have the capacity to pay the higher interest costs. It’s no good everyone borrowing to the max, assuming a 3% interest rate with huge stress and repayment defaults if the interest rate was to increase by only 1%.

Most lenders have reduced their qualifying rates dowm from approx 7.5% to approx 5.5% which will result in people being able to borrow more to buy their dream home or investment property. Actual interest rates have recently been reducing and expected to reduce even more, so a 5.5% qualifying rate seems quite safe in today’s market. That said, some banks were criticized heavily during the recent Royal Commission for under estimating clients actual living expenses, with some clients getting into financial difficulty and claiming that the bank never asked about their lavish lifestyle, or childcare costs, private school fees or ongoing medical expenses. Now banks perform detailed analysis of clients living expenses, ask all the right questions, and if the results are low or reasonable, they often ignore frugal living expenses and use a high base-line of living expenses. If your income is considered high, they now assume your living expenses will also be increased compared with applicants on a modest income.

The result of all these changes is…………no change.
Working through many different client situations using the updated lender in-house calculators, the benefits delivered from the approx 2% lower qualifying rate have mostly been consumed by increases to the clients minimum allowable living expenses. Some lenders do allow frugal living expenses to be used, but they need to be extensively proved. The exercise of documenting living expenses in detail and using bank statement analysis tools and monthly spending home budget tools is very useful for all concerned.