Common misconception: Lenders judge your ability to pay a mortgage based upon your current interest rate.
Kim Wight, Smartline’s personal mortgage advisor, claims that this is false.
During the life of a loan, interest rates will rise and fall and when lenders assess a borrower’s loan application, they do so based on an inflated interest rate, as it gives both the lender and the borrower confidence that the loan repayments can be made without undue hardship.
“All lenders assess a loan application using their own mortgage assessment rate, which is a buffer they add into the interest rate,” Wight explains.
“It can be anything from 1.0% to 2.5% above the variable rate and it allows them to assess your ability to repay the loan, should the Reserve Bank cash rate rise, causing a mortgage interest rate increase during the term of your loan.”
Different mortgage assessment rates are used by lenders, so every lender might offer you a different loan amount. To offer loan products, lenders may use different mortgage assessments rates.
“This means that the amount the same lender can offer you will differ, depending on the home loan product you chose,” Wight says
To prove his point, Wight calculated the current assessment rates (as of August 1, 2013) of three major lenders.
CBA           8.31% – 9.31%
ANZ          8.75 % – 9.70%
ST George 8.45% – 9.40%
“As you can see, the difference in the assessment range within the same lender can be around 1%,” she says. Fixed rate products like fixed rate loans may have a lower assessment rate as they are locked up for a set period of time. Variable rates loans are assessed at an upper end.
Wight claims that the ability to borrow is affected by many other factors, such as the lender’s allowance for minimum daily expenses, the amount of rental income they will allow and how they treat credit cards debt. “The mortgage assessment rate has a bearing on the borrowing capacity, but so too does the lenders internal lending policies,” she says.
Below is Wight’s calculation of the borrowing capacity of an applicant earning $70,000 p.a. All three lenders will approve you for standard variable products with no additional expenses.
CBA             $377,133
ANZ             $397,985
St George  $400,787
This is an important difference of nearly $25,000. This could be the difference between approval and rejection, as homeowners and investors can attest.
Let’s say the applicant were to approach St George. The applicant might be approved for more money or less funds depending on whether they apply a different product like a fixed rate loan. The assessment rate may vary depending on the product.
The interest rate and the mortgage assessment rate could have an impact on your home loan application. Your personal debts may be assessed by the lender. A qualified mortgage broker is an excellent choice if you’re looking for a loan.