As most of you would have heard me say, different lenders use different formulas to work out how much you can borrow.
Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.
Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.
Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through. This is why there’s more to a mortgage than just the underlying interest rate. Depending on your situation, appropriate features that are well used might be able to save you more than a 0.1% cheaper interest rate, for example.
“What is very important is that people understand the ramifications of exposing themselves to debt,” says Andrew Crossley, Homeloans Business Development Manager and best-selling author of Property Investing Made Simple.
“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”
Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.
“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” Crossley says.
The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.
In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how.