We’re experiencing an extraordinary period of inflation and interest rate rises.
Australia is on an unbroken streak of seven months of consecutive interest rate rises totalling 275 basis points.
The last time the cash rate increased so quickly was in 1994 when the rates jumped 275 basis points between August and December.
What impact is this having on lending?
The good news is that banks are still lending, we haven’t seen any reduction to their appetite to assist solid clients.
After all, lenders don’t make a profit declining deals.
However, the challenges of being approved for a loan have become greater.
And that is strongly tied to a topic that we have mentioned in previous blogs – the assessment rate.
It’s not spoken about much but it’s an important barometer for lenders and it has a huge impact on the property market.
When assessing your capability to borrow, lenders will refer to the assessment rate to determine your boundaries as a borrower.
The assessment rate generally sits between 2.5 to three percentage points above your actual interest rate. This is the lenders’ buffer zone. It’s their insurance in case rates continue to rise and they want to ensure the borrower has the capacity to withstand increases.
While this assessment rate will buffer borrowers from hardship in the current rate environment, they may need to contend with it when looking to refinance their loan to a lower rate or take advantage of an investment opportunity.
So, the more debt you’re looking to take on, the bigger the impact that buffer has, and so whilst it impacts everybody equally, the 3 per cent on a $300,000 loan is $9000, 3 per cent on a $3,000,000 loan is $90,000.
The current assessment rate is causing issues for some borrowers.
We recently had a client who wanted to secure a loan with a lender at a fixed interest rate.
However, the fixed interest rate at this lender was 0.9 per cent higher than the variable interest rate.
In the end, the lender would only accept the loan on the variable rate.
Although they had strong income, strong equity and a spotless credit report, their application had to be altered to meet the criteria being applied in this rising rate environment.
While every lender will have a different approach, this was what this client had to work through.
This is the new normal compared to this time last year.
Here are two things to keep in mind:
- Banks aren’t having to deal with the bottleneck and the time pressures that have been prevalent for some time. This time last year it wasn’t a matter of ‘can I borrow the money’ it was a matter of ‘is the bank going to be able to issue the documents and settle on time’. This year the banks have got capacity, they’re still lending money, but the game has changed when it comes to their assessment so being well prepared and having you borrowing capacity calculated within the last 30 days is critical for anyone looking to transact in the short term.
- Don’t budget on today’s figures. Whilst you can look at what’s going on, you have to make the assumption that your interest rate and your repayments are going to increase. And for clients who don’t feel confident with that scenario, and that’s where your loan products like your fixed rates can come into play, but for anyone that’s out there trying to do something, if you’re borrowing is already at the maximum you can afford today, you shouldn’t be going into that deal because rates and repayments may be higher tomorrow.