Westpac Group Decrease Assessment Floor Rate

Should make things interesting with further rate cuts....

Introducing new Home Loan Serviceability Rates, effective Monday 30 September 2019.

Effective Monday 30 September 2019, the floor rate is decreasing to 5.35% p.a. from 5.75% p.a.

These changes will impact the Serviceability Assessment Rate (SAR) that is used for serviceability assessments.

Floor and Buffer Rate.

• If the variable rate applying to the proposed loan plus the interest rate buffer of 2.50% p.a. is less than the floor rate, then the floor rate is applied as the SAR.
• If the variable rate applying to the proposed loan plus the interest rate buffer of 2.50% p.a. is greater than the floor rate, then the rate on the loan plus the interest rate buffer is applied as the SAR.

 

Now ... a couple of RBA cuts, and there will be some real sizzle in the sausage .... although some commentators are speculating that APRA will actually step in to put debt to income limits on borrowing of prices keep rising. One really has to wonder whether anyone who works at the RBA or APRA knows how lending works

 

I suspect that if APRA had their way, people would only be allowed to borrow a minimal amount for their own homes and nothing else. Investors would all have to pay cash.

As best I can see, practically the last assessment rate changes had a negligible effect on investors borrowing power. Lenders generally adjusted assessment rates but at the same time they also made some additional tweaks in their calculators which effectively offset the assessment rate benefit. In some extreme cases, borrowing power for investors dropped significantly in July/August.

 

You're right... they gave with one hand and took away with the other, so that in many cases the actual improvements to borrowing capacity were modest - particularly for investors already carrying a good amount of existing IO debt. It's the same feedback all my broker referral partners have provided as well.... but assuming living expense adjustments are now finished with, these new floor rates combined with any future RBA cuts will actually produce "some" extra borrowing capacity ....

 

Fair summary. Investors on the whole haven't moved too much (especially as more and more move inv property expenses out of HEM).

Overall market wide though - which is dominated by other segments - massive boost overall. Gamechanging for many who need it. It doesn't appear to correlate with RBA's own research on take-up of maximum leverage situations though (although HILDA survey analysis as data point isn't particularly accurate). One small part (big part is rate cuts) of the reason why Sydney and Melbourne, the two cities that benefit most from additional leverage opportunities, are running at a ridiculous boom rate pace at the moment (quite possible likelihood QoQ growth will crack 5% for Aug, Sep, Oct).

 

At the same time the assessment rate policy came in, the CBA decided to include rental income as part of the income calculation for living expenses. The mortgage associated with that rental income doesn't factor into it. They seem to think that when you buy another investment property, instead of tightening your belt to cover the shortfall, you take a holiday or buy a new car.

Call me a pessimist, but I don't think lenders will stop making adjustments to living expenses. The argument is that the cost of living expenses continually increases, lenders need to adjust their HEM tables. We've already seen this over the past 2 years with lenders almost universally issuing new calculators periodically, it's not about to stop.

 

I think I'll call you...

 

Wasn't APRA talking about macroprudential policy in 2015/2016 but didn't go ahead with it?Auckland did it at one stage and you had to have 40% deposit but now back down to 30%
I feel as thou government needs to move the economy and must loosen lending, and macroprudential policy makes sense right now to me

 

WHAT!?!? - that seems crazy! Makes no sense at all. I know I shouldn't be suprised and yet I am.

 

My relationship manager at the CBA agreed. I told him that as most of my business is investment related, he's probably not going to see another application from me until this is replaced with something more rational. Servicing it already difficult enough without badly thought out policies like this.

 

anz was the same until a few weeks ago. just dumb.

 

Does this mean the other majors are likely to follow suit?

 

Makes me think that it's awfully hard for someone to obtain 10 properties in today's lending market, even with a high income and positive geared properties in a few short years.

 

It's awfully hard to accumulate 5 median priced properties unless you're on an income significantly above the median.

Building a portfolio large enough to retire comfortably on is still possible, but it's a lifetimes work, not something that most people could achieve in one or two market cycles.

 

Thank you and I think it's laughable when people still think it's 'easy' to obtain 5 median priced properties in a couple of years. I know I had to work like a donkey and take risks to obtain my IPs.

 

Here's an overview of the problem that I commonly see.

A couple in their late 20s buys their own home in the suburbs of a major capital city. They have incomes that might service a $1.3M debt, but they end up borrowing about $700k.

A bit later there's some equity there and want to buy an investment property. Unfortunately rental yields are lousy and don't have as much effect on borrowing capacity as most people think. They buy something on the fringe suburbs for $600k. With the rent, their total borrowing power is now $1.5M, they've borrowed a total of $1.3M.

They like the investment thing, so a year or two later, they go for another one. Extrapolating the previous figures, they've probably got enough to borrow $1.7M in total with additional rental income. They make some more compromises and buy another IP for $500k at the low end of a major satellite town like Geelong.

At this point they're completely maxed out on their borrowing capacity. They've got their own home and two IPs. Not a bad start, but until rents and incomes increase significantly, they're not going to be borrowing any more. It'll be at least 5 years before they can think of another purchase.

Then this young couple has kids. Servicing decreases more. Probably 10 years before they get back into it, when they're in their 40s.

This is where most people thought they've have a massive portfolio and get dejected about not being able to buy a property every year.



They push though, and then they buy another property or two in their 40s, then again in their 50s.

By the time they're in their 60s, the kids have left home, their owner occupied property is paid off. Tons of equity in the first to properties and those debts are a long way down as well. They've got their own home and 6 IPs with varying levels of debt.

Now they sell one property, then another a few years later. This allows them to pay off the remaining debt and at 65 they retire quite well with over $100k in taxable income (in today's income, after holding costs). Given they have no other debt, this gives them quite a decent lifestyle, especially when supplemented with super.

Definitely a good outcome by most middle class standards, but it took 35 years to achieve. Not the 15 they initially projected.

There's plenty of things that could be done to speed up this process. Most people wouldn't even do this much. The key to this, like any long term endeavour, is consistency. Invest when you can. One property every year or two is completely unrealistic for most people. One property every 5 years will get you a great result if you stay the course and give it enough time.

 

If you have hit the service wall but enough cash in your offsets, is it possible to buy it under a trust/company structure where the rent covers the interests and other ongoing costs?

 

certainly is.

You could lend the trustee or company the money.

but if there is a bank involved and personal guarantees the serviceability will be including all debts and incomes of the guarantor so it won't really make much difference.

 

If you mean doing a new loan in trust name then no, the lender will look through the trust at your personal position.