Drop in assessment rate ...

AFR Snippet -
Select mortgage brokers have been informed by Westpac-owned St George Bank the serviceability floor - which is the minimum interest rate a borrower must be able to pay - has been reduced to 6.5 per cent from 7.25 per cent effective immediately.

Link below -
Westpac jumps gun, lowers APRA buffers

 

The article estimates it will improve capacity by 8%. for some borrowers. I think we predicted @ 10%ish...so we were pretty spot on.

 

Calc doesn't appear to have been updated yet

 

This is only a start....in 3-5 months they will cut even more. Morons only started understanding what they did

 

Only half the story though, since they increased their expenses calc, so servicability isnt actually any better

 

What do you mean?

 

About time they did something! There borrowing capacity was great many years ago and it went to S#%T

 

I particularly liked this part:

"While the calculators being used by St George have not been changed The Australian Financial Review understands low risk loans submitted by borrowers will be approved providing they meet the new 6.5 per cent floor."

Surely if these borrowers are considered "low risk" then they'd pass the 7.25% serviceability level. If you need to drop the serviceability requirements for them to qualify for a loan then surely by definition they're the more risky loans not low risk ones.

 

@Woodjda risk isn't just determined by income/affordability - that's just one of many factors that is considered.

 

APRA etc...will ease up...like before............

 

I think the effect depends heavily on the client profile and it will also depend on how each lender implements the recommendation.

My recollection was they were talking about removing the floor and adding 2.5% to the actual rate. This move by Westpac is just reducing the floor rate with no consideration to the actual rate.

I've modelled out a few scenarios. In some cases servicing was improved by as much as 20%. At the other end of the spectrum, servicing went backwards. In this case it's really not much of a consideration given it's only for P&I owner occ loans.

A few weeks ago Westpac effectively ruined their serviceability with their new policies, HEM figures and calculator. Seems like they're trying to claw some of that back now.

 

Considering the wafer thin margins the big banks build into their affordability analysis, if they can't afford the repayments at 7.25% then they're a minor problem away from being unable to afford the loan. Under no circumstances is that a low risk loan. Maybe they only want a 60% LVR loan so it's lower risk for the bank but it's still not a "low risk loan" for the person taking it out. It just looks like another way that APRA is looking after the interests of the banks and real estate industry and if anything goes wrong in the economy it'll be left to the over-leveraged property owners and the government to bail everyone out.

 

My understanding is that this only applies to the new loans that being taken out as PPR P&I loans.

So investors with existing investment loans are still having their existing IP loans assessed at 7.25 P&I.

 

Unlikely but I suppose it does depend on the borrower's financial profile.

There's a lot more margins built into lenders servicing calculators than just the assessment rate. Virtually every figure on a lenders servicing calculator is determined using the most conservative approach they can think of.

 

Someone has to kick things off.
My bet is the Big4 CEOs sit in a room playing spin the bottle and the loser has to test the waters.

We saw it last last week when ANZ came out first with .18bps. Based on media and consumer response the others said “stuff that!”.

Looks like Westpac has lost this time and has to test the waters of new assessment rates. I’m not sure an 8% increase will have consumers banging down their door though.
I expect the other big3 to announce a bit more lenient assessments in the next 2 weeks.

 

Sorry but there's absolutely no evidence of that. The banking RC showed the banks had no interest in realistic expense measures. The use of the HEM was a downright joke. Yes things have improved but I can tell you from a meeting with CBA less than a month ago that they're still very loose in how they define expenses. As far as I could tell there was also no consideration of increased costs of ownership (maintenance, rates, insurance) in their calculations either. They're not as lax as they were but there's nothing at all conservative about the current methods.

Put it this way, if my wife and I were to try and get a loan in the UK we would almost certainly be limited to 5.5x our income. At CBA, despite their interest rates being 1.5-2% higher than you can find in the UK, they saw no problem with offering us a mortgage 6.5x our income. That just doesn't add up.

 

Imo the main thing here is a shift in sentiment/attitude towards lending. I never believed this tightness in lending would last too long. Its always been business as usual. Cycles of lending, markets, etc etc. Nothing significantly new this time round. If you stick to acquiring strong assets with good fundamentals, medium to long terms you should do relatively well.

 

I agree. I know a lot of people with zero borrowing requirements at all who sat it out last year waiting for sentiment to change, and have now come back in.

As they say on Wall Street, people don't buy bottoms, they buy momentum.

 

Be fearful when others are greedy and greedy when others are fearful - Mr Buffet!

Statement is worth $mill..

 

I can assure you there's plenty of evidence of lender conservatism. I see it every day.

The banker you met asked you about your living expenses. Are you aware that the the loan assessor cross references this with your transaction accounts? In my experience at least 80% of borrowers understate their actual expenses.

One of the categories many lenders ask about is existing and proposed property holding expenses. Rates, maintenance, etc. They start asking questions if the declared figure is too low. At the same time lenders continue to shade your rental income by 20% - 30%. That used to be allocated to those holding expenses, so now they're double dipping on this.

I'm willing to be that the CBA banker would have reviewed your living expenses after you left. I would because if they're understated on too many applications, the CBA may cancel my accreditation.

I'm extremely familiar with the CBAs assessment policies and quite a few other lenders as well. I can walk you through their servicing calculator and point out numerous policies and how it's reflected in the figures on the calculator and where the conservative elements lie.