Borrowing Capacity
The borrowing capacity you have is a function of many factors but one of the most important is the rate of interest being charged and the assessment buffer. The assessment buffer is an additional interest rate amount added to your actual rate to model the impacts of rising interest rates. At the moment this is set at 3%. This means when rates were 2.5% last year, the assessment rate was only 5.5%, but now that interest rates are 5.5%, the assessment rate is a whopping 8.5%. This has significantly affected the amount clients can borrow and has effectively reduced that amount (all else being equal) by up to 30%. That results in…
Mortgage Prisoners
Unfortunately, a large number of mortgage holders are now not able to refinance when their fixed rate ends or if their variable rate is uncompetitive. They effectively become mortgage prisoners. Worse still, new-to-lender discounts are up to 1.0% higher than for existing clients and therefore existing clients who can’t refinance are at the mercy of the bank. And we all know that’s not a good position to be in.
The Game Changer
The game changer is the reduction in the assessment buffer. One large lender (and more may follow) has changed their policy and is assessing refinance (only) loans at an assessment rate of only 1%. The impact of this is substantial. I have constructed a table below which gives a demonstration.
As you can see from the table, reducing the assessment buffer from 3% to 1% allows for an additional borrowing capacity of approx. 22%. This can be the difference between rolling off a 2.5% fixed rate to a 6.5% (or higher) variable rate OR refinancing to a new lender at 5.5% with a cashback (the lender in question is still offering a cashback) and extending the loan term if that’s needed.
Make no mistake this is huge. If you or anyone you know is having trouble meeting their repayments or is worried about what’s going to happen when their cheap fixed rate ends – get them to contact me. It could be the most financially rewarding call or email they make this year.
