Westpac makes significant change to home loan assessments

One of the nation’s biggest banks has watered down the tests it uses to assess home loans in a move that signals rate cuts are on the way. FIND OUT HOW CUSTOMERS ARE IMPACTED

One of the nation’s biggest banks has watered down stress tests that apply to assessing home loans in a move that signals more rate cuts are on the way.

Westpac today revealed it would drop its home loan floor rate — a benchmark interest rate applied to a customer’s loan — to determine if a borrower could comfortably afford repayments should rates eventually rise.

From next Monday, Westpac will adopt a new home loan serviceability rate (SER) of 5.35 per cent, making it the lowest of the big four banks.

Rival banks’ SERs sit at the following — Commonwealth Bank at 5.75 per cent and ANZ and

National Australia Bank at 5.5 per cent.

Westpac’s latest move indicates more rate cuts could be on the way. Picture: Hollie Adams/The Australian

Banking sources said the move indicated more rate cuts were imminent and the bank was keen to stay competitive within the home loan market.

Often smaller financial institutions use much lower SER’s making it easy for them to dish out loans to customers.

Banks can set their own minimum SER when assessing customers but under the banking regulator, the Australian Prudential and Regulation Authority’s guidelines, they must adopt an interest rate buffer of at least 2.5 per cent over the customer’s actual rate they are paying.

Whichever assessment rate is higher that is applied to the actual rate the customers is used.

So for example, if a customer is paying a rate of 3.5 per cent, the buffer rate adds 2.5 per cent which increases the rate to 6 per cent.

This applies and overrides the SER of 5.35 per cent.

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Home loan interest rates could fall further with further cash rate cuts expected.

Westpac Group’s general manager of home ownership Will Ranken said the bank constantly reviewed its mortgage products to ensure they met both “market conditions and customer needs”.

“We are committed to helping customers into their homes and this change may have a positive benefit for qualified borrowers looking to take out a loan for a property,” he said in an issued statement.

Typically savvy mortgage customers are paying a rate in the three to four per cent range.

The new SER applies across all Westpac brands including Bank of Melbourne, BankSA, St George and RAMS.

Westpac’s move comes only two months after it moved its SER from 7.25 per cent to 5.75 per cent.

CommSec’s senior economist Ryan Felsman said a rate cut next month was close to being a certainty after August unemployment figures increased.

CommSec’s Ryan Felsman says another rate cut is on the cards. Picture: Supplied.

Australian Bureau of Statistics data showed in August the unemployment rate climbed by 0.1 per cent to 5.3 per cent.

“Our view is the Reserve Bank will likely cut interest rates on Tuesday,” Mr Felsman said.

“It’s mainly due to a weakening in the jobs market and a loss of full-time jobs.”

He also said sluggish wage growth and continuing global tensions continued to put pressure on the Australian economy.

“The global tensions between the US and China have escalated or intensified as well,” Mr Felsman said.

He said while home loan customers would be the big winners from further rate falls, but self-funded retirees would be hardest hit by further drops to already dismal savings rates which are around the 1 to 2 per cent mark.

“If you are one of the 30 per cent of Australians with a mortgage with interest rates being cut and mortgage rates at 50-year lows, that will alleviate some stress around those repayments,” Mr Felsman said.

“But Australians are quite fixated on paying down debt.”

@sophieelsworth

Originally published as Westpac makes significant change to home loan assessments