In May, the Reserve Bank board voted to hike the rate in the face of rising inflation. That was followed by three more consecutive rises, bringing the interest rate from 0.1 per cent to 1.85 per cent. Today we chatted with mortgage broker Josh Bartlett from Mortgage Advice Bureau on how banks look at rates, pre-approvals and serviceability in relation to rate increases and what that means for buyers looking to buy in today’s market.

Pre-approvals

Are banks still honouring pre-approvals that were provided to buyers before a certain rate increase? Depends. Currently, less than 50% of the banks across multiple tiers would be holding and keeping their pre-approvals valid after a rate change (that is if there are no changes in the borrowing amount or LVR). Most banks would be taking the rate increase to their reassessment and borrowing capacity will be impacted by borrower’s updated pre-approvals.

Why is my bank not lending me in certain areas or buildings?

Sometimes banks are not lending based on borrowers’ income, size of the deposit and spending pattern but every bank has its own appetite in each postcode and individual buildings, once they reach a certain percentage threshold in a building their desire of lending in the same building diminishes greatly.

What is a serviceability buffer and how does it work?

The serviceability buffer is almost like a safety net, for both you and the bank. It is applied to ensure that borrowers are able to service their mortgages under a range of scenarios. It is sometimes referred to as a home loan stress test because the assessor is essentially testing whether you can make repayments on the loan at a higher interest rate without experiencing financial stress.

Previously, banks were expected to add a serviceability buffer of 2.5% to the loan product interest rate when assessing home loan applications. However, on October 6, 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate serviceability buffer it expects banks to apply to 3%. So now, for a loan product that has an interest rate of 2.72%, banks are required to assess your ability to meet your repayments for that loan at an interest rate of 5.72% (3 percentage points above the loan product interest rate).

Advice for buyers

Do not chase the number - sometimes banks that pre-approved you with the lowest interest rate won’t lend in the area or building that you ended up purchasing, it is important to secure a quality loan product that honours the agreed rate, LVR on the pre-approval to avoid surprises on the Monday after Saturday’s auction.

Every time you find a property, call your broker.