Earlier this month, Westpac, St George, and Macquarie banks reduced the serviceability floor rate for home loans from 5.35% p.a. to 5.05% p.a., meaning an increase of borrowing capacity and an opportunity for expat investors and home buyers.
The decrease to serviceability floor rates comes off the back of announcements made by Philip Lowe of the Royal Bank of Australia (RBA) in May this year and an ongoing trend toward reduction amid growing recession and pandemic woes.
In Gareth Hutchens’ article, published on 28 May, by ABC news online, Lowe claimed that interest rates would likely remain at 0.25 percent for years – until the unemployment rate was back to around 4.5 percent.
‘We’re not going to be raising interest rates until full employment is in, and we’re sustainably within the 2-3 percent target range for inflation,’ he said. ‘I think it’s reasonable to expect that that will not be for some years.’
By dropping their floor rate to 5.05%, the Westpac group reflects the low rate environment we are currently in and proves to customers that they want their business, so they borrow more.
Thus, the other big banks will likely follow this trend (Westpac’s new 5.05% rate comes in below ANZ’s 5.25%, CBA’s 5.40%, and NAB’s 5.50%), and if they do, borderline customers across major lenders will have more chance of loan approval and help the economic downturn shift back.
What this means for expat investors
Reductions to rates are good for Australian-based home buyers but are even better for international purchases and the expat community.
When you apply for a home loan, the lender assesses all your loans, new and existing, at rates much higher than the actual rate you pay. Government regulator, Australian Prudential Regulation Authority (APRA), requires banks to ensure their customers can repay loans at 2.5% more than current interest rates, or the ‘floor’ rate set by the bank, whichever is higher. They call this the earthquake test, and it is there to ensure that if interest rates rise, you can still service your loans.
Over the last few years, interest rates have decreased, but the serviceability floor rate had not moved. Given the pandemic and unexpected recession-era we are now facing, rates will not increase soon. The government wants people to borrow money to buy properties and help prop up the economy. Last year, floor rates dropped to 7%, meaning customers could borrow more based on cashflow and mortgage repayments; however, they couldn’t borrow more money on paper even though their real-life affordability had improved.
Because expats have additional borrowing capacity restrictions, banks will assess 60% to 80% of actual income to account for foreign exchange risk. The benefits of investing now in a recession-like market are paramount, as the decrease to 5.05% means for some Australian expats (permanent residents living overseas), the borrowing capacity increases by up to 15-20%.
And if you are only borrowing 60% of the property value, some banks will give you a very low-interest rate; for example, Macquarie Bank’s current variable investor rate is 2.69% p.a.
While we expect this trend to last some time, the rate reduction is excellent news for Australians living overseas who’d like to invest now. As the Expatland mortgage partner, Stoneturn is well placed to assist you with enquiries about the changes.
If you are an Australian expat who would like to review a current loan or explore new mortgage options, please get in touch with Stoneturn today.