Young adults willing to invest
Young adults willing to invest

Don’t fall for this home loan trap

POTENTIAL borrowers' ability to get a home loan has been made easier but experts are warning customers "not to bite off more than they can chew".

The banking regulator this month changed the rules around assessing a borrower's ability to pay back a loan.

Previously lenders used a minimum interest rate of 7.25 per cent to determine whether a customer could cope with their repayments if rates rose.

Lenders can now use an interest rate buffer of just 2.5 per cent over the loan's existing rate, making it easier for borrowers to get larger loans.

Financial comparison website RateCity's spokeswoman Sally Tindall said the changes could result in more Australians getting their home loans approved.

However, she warned customers to not let the bank decide how much money you can borrow.

"Sit down and work out exactly how much you can afford each month, factoring in a buffer of at least 2.5 per cent, if not 3 per cent above the bank's existing rate," Ms Tindall said.

"Rates are at historic lows right now but a home loan is for 30 years - rates will rise in this time."

The Reserve Bank of Australia governor, Philip Lowe, has cut the cash rate twice in two months, dropping it to a record low of 1 per cent this month.

Borrowers should not necessarily take out a bigger loan just because a lender is offering it to them.
Borrowers should not necessarily take out a bigger loan just because a lender is offering it to them.

Both variable and fixed rate loans continue to fall and some deals now have a "2" in front.

RateCity data found for a family of four people with a household income of $109,000 and average weekly expenses of $2000, they could previously borrow $478,000 using a serviceability rate of 7.25 per cent.

Under the new changes, using a serviceability rate of 6.5 per cent, they could borrow an extra $38,000 to $516,000 in total.

Home Loan Experts' managing director Otto Dargan said the changes to the serviceability rates was a "good thing for borrowers" because previously "the bank couldn't lend the amount they could afford".

"The new assessment rates used by banks still have a significant buffer that will protect borrowers from future rate increases," he said.

"Borrowers should always be cautious and consider their own budget and circumstances before rushing into a larger loan."

The Mortgage Finance Association of Australia's chief executive officer, Mike Felton, said the changes could allow lenders to stress test a customer's ability to afford the loan that aligns with a low interest rate environment.

"This strikes the correct balance between maintaining consumer protection, allowing access to credit and ensuring an appropriate level of competition between lenders," he said.

sophie.elsworth@news.com.au

@sophieelsworth



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