Advertisement

Borrowers need to afford a 7% interest rate

APRA has locked in several home loan lending criteria to ensure that people really can afford the loans they’re applying for.

The Australian Prudential Regulation Authority (APRA) has released for consultation revisions to Prudential Practice Guide APG 223 Residential mortgage lending to incorporate measures either announced by APRA in December 2014 or communicated to authorised deposit-taking institutions (ADIs) since that time.

While none of the revisions should come as a surprise for lenders, one revisions that borrowers will need to be aware of is that their ability to repay a home loan will need to be assessed at an interest rate that is two percent above current rates. This means that borrowers should factor in a rate of around seven percent.

What would a 7% home loan rate cost?

Currently on CANSTAR’s database, minimum, maximum and average home loan interest rates for an owner-occupier borrowing $300,000 are as follows:

Table: Residential Home Loan Market – Snapshot of the current market (24/10/2016)
Stat Standard Variable Package Variable 1 Year Fixed 2 Year Fixed 3 Year Fixed 5 Year Fixed
Average 4.45% 4.29% 4.19% 4.03% 4.06% 4.52%
Min 3.35% 3.64% 3.39% 3.64% 3.59% 3.80%
Max 5.73% 5.23% 5.04% 4.99% 5.05% 5.49%

Source: www.canstar.com.au, the search results do not include all home loan providers, and may not include all features relevant to you. Loans based on loan amount of $300,000 and available for principal and interest repayments, products listed on Canstar database. Please note these are advertised home loan rates; please check specific home loan products for comparison rates.

Based on a 4.50% interest rate, approximately monthly repayments on a home loan with a 25 year loan term would be as follows:

Loan Amount  $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Years 25 25 25 25 25 25 25
Monthly Repayment $3,335 $3,057 $2,779 $2,501 $2,223 $1,945 $1,667
Total Cost over 25 years  $1,000,498  $917,123  $833,748  $750,373  $666,998  $583,624  $500,249

Based on P&I repayments over 25 years. Assumes an interest rate of 4.50% and does not take into account any fees or other charges.

The same repayments with a 7% interest rate would be as follows:

Loan Amount  $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Years 25 25 25 25 25 25 25
Monthly Repayment $4,241 $3,887 $3,534 $3,181 $2,827 $2,474 $2,120
Total Cost $1,272,203 $1,166,186 $1,060,169 $954,152 $848,135 $742,118 $636,101

Based on P&I repayments over 25 years. Assumes an interest rate of 7% and does not take into account any fees or other charges.

So what is the difference in monthly cost? It works out as follows:

Loan Amount  $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Monthly Difference ($906) ($830) ($755) ($679) ($604) ($528) ($453)

Share this article