Home borrowers set to receive major lending boost

New modelling by Independent Mortgage Planners shows that home buyers are set to receive a borrowing boost to loans in the order of $50,000 due to changes in lending standards.

A single borrower with an annual income of $80,000, no other debts and average (or below) living expenses could today expect to be approved for a maximum loan amount of $512,000.

This could increase to $567,000 under the proposed relaxation of loan serviceability rules flagged by the banking regulator last week, according to modelling by Independent Mortgage Planners.

This translates to a wider choice of houses being available to purchasers at Monument.

That same loan could increase again to $598,000, if the Reserve Bank also delivers anticipated interest rate cuts of half a percentage point in coming months, by enabling borrowers to service higher debts from a given income.

If banks did relax standards to the permissible maximum, a dual income couple with no kids, both on incomes of $80,000, could expect to borrow about $150,000 more – boosting their potential loan size over the $1 million mark. The same couple, but with two kids in tow, could borrow $122,000 more, for a total loan size of approximately $841,000.

Since 2014, lenders have been required by the Australian Prudential Regulation Authority to make sure potential borrowers can service their loan sizes at an interest rate of 7%, with most lenders using a slightly higher test of 7.25%.

The regulator now proposes borrowers be tested for their capacity to meet repayments at the prevailing mortgage rate – currently around 3.75% – plus a buffer of 2.5% being a total of 6.25%

If the Reserve Bank also lowered interest rates by another half a percentage point, that would fall to 5.75%, a full 1.5 percentage point below the current test.

The calculations assume that lenders choose to relax their standards to the maximum permissible.