CBA has changed its Home Loan Assessment Floor Rate, raising it 15 points up to 5.25% per annum. Their interest rate buffer will not change, and has been fixed at 2.50% p.a.
CBA put the move down to a reassessment of home loan affordability in the sector.
The Home Loan Assessment Floor Rate is the method by which CBA and other banks assess the ability of customers to repay a loan. Banks factor in rises over the life of the loan, using their Floor Rate as a benchmark rate used to assess serviceability.
A customer’s loan application is tested against a higher rate than the one they actually receive, so that banks can get a better handle on their ability to keep up with repayment in the event of higher rates in the future.
In this case, CBA’s buffer is 2.50%, meaning that their actual rate, plus the buffer, is now 5.25% per annum at the absolute lowest for the purposes of assessment. For those applying for rates higher than the lowest possible, the assessment rate is higher still.
“With the RBA making comments on an increased cash rate sooner than expected coupled with a hot property market, an increase in the assessment rate by Commonwealth Bank wasn’t a surprise although I personally didn’t expect it to come so soon,” said Raj Ladher, Home Loan Specialist at YourMortgage.
“I would imagine other banks will follow suit with some lenders floor rate still sitting as low as 4.95%.”
“Some banks are also focussing on other thresholds, such as Loan to Income (LTI) and Debt to Income (DTI). Although the LTI and DTI is a ratio banks have always considered, there was always room for mitigating circumstances, however now some banks have a hard NO should the ratio’s surpass the banks policy.”
“I personally think the increased assessment rate is a good thing as I have seen clients wanting to push to their maximum borrowing capacity as they are more than comfortable to make the repayments as they are.”
“However once interest rates start to increase, repayments may become a little uncomfortable. In addition, hopefully this will slow down the hot property market allowing first home buyers into the market which is one of the regulators objective.”