Episode Details

Two weeks ago, APRA told the banks that it no longer expects them to use a benchmark interest rate of 7.25% when testing an applicant’s borrowing capacity. Instead, they must add a buffer of at least 2.50% onto the loan’s interest rate. Given most home loan interest rates are in the 3’s, that could substantially improve your borrowing capacity.

The banks are starting to push back on regulators

Until now, the banks have remained relatively silent about the government’s crackdown on lending standards which has resulted in a severe reduction in borrowing capacity. Of course, they have wanted to stay out of the limelight given recent bad press from the Royal Commission. However, they have now found their voice and have said the level of tightening is impractical, anti-competitive and potentially damaging to the economy.

ASIC will hold public hearings in in August as part of its public consultation process. The banks will have an opportunity to voice their concerns in a more public arena.

How banks assess your borrowing capacity

The banks will typically make a number of adjustments to assess your ability to service debt. Whilst all lenders have different rules, the below formula summaries the banks typical approach.

See table here: https://www.prosolution.com.au/borrowing-capacity-increased/

The table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.

The impact of the recent benchmark interest rate reduction

Last week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4’s borrowing capacity using the same inputs and the table below summarises my findings.

See table here - https://www.prosolution.com.au/borrowing-capacity-increased/

ANZ’s borrowing capacity has increase by 20% whereas Westpac’s only increases by 8% because it made some changes to minimum living expenses – they give with one hand and take with the other. It is interesting to note that ANZ and nab’s borrowing capacity vary by almost 17%! This demonstrates that it’s important to compare a number of lenders.

Please don’t conclude from this that ANZ’s borrowing capacity is always higher than nab. There are so many variations in policy, calculations and individual client situations that this may not always be the case.

Living expenses are the real problem

The more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.

The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.

But of course, that is nonsensical. If you exp