Borrowing power increased “overnight”

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A recent APRA decision is set to see the average Aussie family having around $60,000 more borrowing power.

Previously, APRA made banks check whether home loan applicants could pay their mortgage at a rate of at least seven per cent. Most banks applied a minimum rate of 7.25 per cent.

Under new rules introduced earlier this month, banks can now set their own serviceability minimums, provided they also apply a 2.5 per cent buffer on the current interest rate when assessing an application.

For many Australians the move is likely to significantly boost their borrowing power by tens of thousands of dollars. analysis shows a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25 per cent instead of 7.25 per cent.

The average single person would be able to borrow up to around $50,000 more under the same scenario. research director Sally Tindall said this change from APRA will increase people’s borrowing power overnight.

“Many Australians may suddenly find they can get their home loan approved, however, with more buyers in the market, house prices could also take-off again,” she said.

“Australia is in a very different home lending landscape than when the seven per cent buffer was made in 2014. It was time to re-assess what has become an out-of-date interest rate floor, especially on the back of two RBA rate cuts.

“APRA has eased off the brakes slightly, but that doesn’t mean it will be a complete field day for borrowers. There are still a number of checks and balances in place to make sure people aren’t jumping into home loans they can’t afford to repay,” she said.

“APRA is also allowing banks to set more than one interest rate floor, acknowledging that lenders often charge lower rates for some loan types, such as owner occupiers.”

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