How does a bank’s assessment rate impact my borrowing power?
Many aspiring & current first home buyers assume that lenders use the current standard variable rate they are offering when figuring out a buyer’s borrowing power. Unfortunately, this isn’t true. Instead, lenders use an assessment rate to work out how much you can borrow.
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The assessment rate is an interest rate that includes a buffer in addition to the lenders’ standard variable rate (SVR). The assessment rate is typically 2-3% above the bank’s SVR, however, the assessment rate differs from lender to lender. Lenders use the assessment rate to ensure you can still afford your first home loan repayments in the event of interest rates rising, which would add to your current minimum repayments.
Below, we take a look at the assessment rate in more detail and how it impacts first home buyers who are trying to get their first home loan.
What is the current ‘assessment rate’
Typically, lenders don’t publish their assessment rates, however, your lender or broker is required to disclose the assessment rate and the sensitised repayments at that rate in the Credit Proposal. The Credit Proposal is a document that your broker/lender is required to send to you before submitting any loan applications. This document outlines your objectives & requirements for the loan and the rates/fees associated with your loan.
The assessment rates of the lenders on the FHBA Mortgages panel of lenders range from 7.10% to 8.26%.
To give first home buyers an idea of how much the weekly repayments differ between the assessment rate, SVR and discounted variable rate we have prepared a comparison based on the example below:
A first home buyer is looking at borrowing $400,000 with ABC Bank which is offering an SVR of 5.50% and a discounted interest rate of 3.90% (The lender’s assessment rate is 7.50%)
Repayments at actual interest rate of 3.90% – $435 per week
Repayments at the SVR of 5.50% – $524 per week
Repayments at the assessment rate of 7.50% – $645 per week
The advantages of having an ‘assessment rate’
- Responsible Lending – The assessment rate ensures lenders are more prudent in how much they lend to first home buyers
- Certainty – In the event of your actual interest rate rising to the assessment rate in the future, you will feel comfortable to know that you should still be able to afford your repayments without adjusting your lifestyle dramatically
- Protection – The assessment rate protects first home buyers from future interest rate increases, by ensuring you can still afford to make your repayments if interest rates rose
- Economy – The assessment rate limits the economic shocks that may occur as a result of rising interest rates leading to borrowers not being able to service their home loans
The disadvantages of having an ‘assessment rate’
- Reduced borrowing capacity – The assessment rate means you may not be able to borrow as much as you think you can for your first home
- Falling interest rates – As we have seen in Australia over the past few years, RBA’s cash rate has actually fallen and they have now been stable for over a year, assessment rates have either been stable or risen
- The gap – Due to greater regulations the gap between the actual (discounted) interest rate and the assessment rate is widening which makes it harder to borrow your desired amount as a first home buyer
Which lenders will offer the maximum loan?
Assessment rates could ruin an otherwise strong home loan application, but they have been introduced to help ensure you can afford your loan repayments in the event of interest rate increases. Your FHBA Broker/Coach can assess your situation at no charge and give you an indication of your borrowing capacity by taking into account the lender’s assessment rate.
First Home Buyers Australia