Does The Latest Rate Cut Really lead to Better Home loan Affordability.
As Interest Rates continue their downward cycle, many authorities point to the improvement in home loan affordability that comes with the reductions, but is this true ?
Home loan affordability falls into two simple criteria, that being the “Haves” and the “Have Nots”
If you are fortunate enough to be in this category and be an existing Home Owner, then the continuing reductions are clearly of benefit to you, and provided you are in a variable rate arrangement, lender reductions will automatically flow through to your loan. With some Lenders this may also automatically reduce your regular instalments, with other lenders it may be necessary to ask for the instalment reduction.
“The Have Nots”
Many New or First Home Buyers rely on media commentary to determine if it is right for their circumstances to pursue the Great Australian Dream of Home Ownership. Clearly the reduced rates will mean that instalments over a standard loan term are cheaper at the lower rate levels, however does this make the loan more affordable ?
When applying for a Home Loan, all Lenders have an Assessment Criteria. This Assessment Criteria makes allowances for things such as your standard and discretionary living expenses, the level of any existing commitments and the potential for the current low interest rates to start rising. This last factor is what is known as an Assessment Rate.
For example, If a Lender is offering a Variable Rate Loan at sub five percent interest rates, then they will “Assess” your affordability at their Assessment Rate which is a minimum of two percent above the offered rate with a floor limit for most Lenders of anywhere between 7.25% and 8.00%
For the last three interest rate reductions, there has been no reduction in the Lenders Assessment Rates. This means that Home Loan affordability for the “Have Nots” has not change at all, despite recent interest rate reductions.
At the time of writing (5th May 2015), The Reserve Bank of Australia has announced another interest rate cut to a record low of 2.00%. It is most likely that competitive forces will cause most lenders to pass on this cut in full, however now with four consecutive interest rate cuts, will we also see a reduction in the Lender Assessment Rates ?.
If so the pundits can truly make their claim of improved Home Loan affordability for all.
For any further information, or for a review of your personal Home Loan options, please contact the writer.
Customers First Mortgages & Insurance
0418 228 835
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