As a borrower, are you aware of what a mortgage assessment rate is and the impact it has on your ability to successfully apply for a home loan?!
There is a misconception that lenders assess your ability to repay a home loan based on interest rates at the time of your application. This is not the case.
Interest rates will rise and fall during the lifetime of a loan. When lenders assess your application, it is always based on a higher interest rate, to reduce the likelihood of default or undue hardship in meeting your loan repayments.
The level of the buffer lenders add to the interest rate is known as the mortgage assessment rate, and this varies from lender to lender. This buffer can range from 1.0% to 2.5% above the variable rate, and helps protect the lenders against variations in the interest rates during the life of the loan.
Not only do the mortgage assessment rates vary between lenders, they also vary across the range of loan products offered by each lender. These variations mean that when you apply for a loan each lender will offer you a different loan amount, depending upon the lender and the type of loan.
As an example, compare the current (August 2016) standard variable assessment rates of three lenders:
NAB = 7.4%
CBA = 7.47%
Fixed rate products can attract a lower assessment rate, as the interest is locked in for a set period, while variable rate loans are often higher.
Variations in the banks’ mortgage assessment rate, combined with the variations in their internal lending policies, such as allowances for minimum living expenses, percentage of rental income or other income accepted for repayment servicing and treatment of your credit card debt, all have a bearing on the lenders assessment of your borrowing capacity.
Based on the example rates above, the maximum borrowing capacity based on income of $75,000 p.a. with no other expenses, for a standard variable loan is:
NAB = $474,884
CBA = $433,472
The difference is substantial at almost $41,500. As many potential homeowners and investors can attest, this could mean the difference between your loan being approved or not approved.
If you are in the market for a home loan, it clearly pays to contact an experienced, qualified mortgage broker who can guide you towards the lenders most suited to your situation. Whether you are looking to buy your first home, love home, refinance or invest, a mortgage broker can help navigate the variations between lenders to secure you the most appropriate loan for your needs.