{"id":8243,"date":"2016-06-13T10:00:02","date_gmt":"2016-06-13T00:00:02","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=8243"},"modified":"2016-06-13T10:00:02","modified_gmt":"2016-06-13T00:00:02","slug":"serviceability-vs-affordability","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/serviceability-vs-affordability\/","title":{"rendered":"Serviceability vs Affordability"},"content":{"rendered":"

Lots of questions coming in about what the banks are doing, where rates are headed and how much I can borrow.\u00a0 Andrew Mirams<\/strong> from Intuitive Finance looks at the difference between serviceability and affordability.
\n 
\nTranscript:<\/strong>
\nKevin:<\/b>\u00a0 One word comes up time and time again when we\u2019re talking about property, and that is about affordability. There\u2019s another word, too, that you need to be concerned about, and that\u2019s serviceability. What\u2019s the difference, and how do you apply them to your own individual situation? I\u2019m going to ask that question of Andrew Mirams from Intuitive Finance.
\nHello again, Andrew, and thanks for your time.
\nAndrew:<\/b>\u00a0 Hi, Kevin. How\u2019s things?
\nKevin:<\/b>\u00a0 Good, mate. Run me through the differences between affordability and serviceability.
\nAndrew:<\/b>\u00a0 That\u2019s a great question, Kevin, and at the moment with APRA and our regulators looking over the lenders\u2019 shoulders and just making sure that they have some strong prudent lending standards, the differential is really widening.
\nIf we talk about affordability, that\u2019s what you\u2019re literally paying out in terms of what rate you\u2019re paying and your interest-only payments or principal and interest payments, and this is where the differential is starting to widen. With rates at all-time lows, to hold money it\u2019s arguably never been cheaper than what it is today, whether that\u2019s a home loan or an investment property, etc., so with really low rates, that\u2019s your affordability question.
\nAlso, if they\u2019re interest-only versus principal and interest \u2013 there needs to be some analysis around that \u2013 then obviously your affordability is really low because you\u2019re getting a rent coming in and it\u2019s not uncommon for that rent to meet the best part, or if not, if it\u2019s positively geared, meeting all your interest repayments.
\nOn the other side, you have serviceability, and this is where, of recent times, the regulators have been doing a lot of work around. What they\u2019re doing is lenders are basically being asked to service, and even with the recent rate decrease, lenders haven\u2019t adjusted their serviceability rate. So they\u2019re still servicing debts at 7.5% to 8%, around that sort of figure, and if you have an interest-only loan of, say, a five-year term in there, you\u2019re actually servicing it over only the remaining term, being the 25 years. So you have the double whammy of a shorter term with a higher interest rate that you actually have to meet your serviceability.
\nThis is where clients and a lot of people aren\u2019t quite understanding the difference between what it\u2019s actually costing them \u2013 which is very, very low \u2013 versus now what the regulators are saying: \u201cNo, if clients can\u2019t meet those standards, you\u2019re not to lend any more money to them.\u201d
\nKevin:<\/b>\u00a0 That buffer is increasing, I take it, between affordability and serviceability.
\nAndrew:<\/b>\u00a0 Absolutely.
\nKevin:<\/b>\u00a0 That\u2019s largely driven by the banks trying to be conservative, I guess. Is that right?
\nAndrew:<\/b>\u00a0 Well, it\u2019s not really the banks. The banks make money by lending money, Kevin, so that\u2019s not lender driven; this has very much been the regulators. In the middle of 2015, they came out and said, \u201cRight, all the lenders, you\u2019re either going to have to put up and raise more capital, or you\u2019re going to have to start to change your standards.\u201d
\nThey were worried about some of the lending standards that they didn\u2019t believe were that prudent, and I agree with a lot of the measures. Really high LVRs, 97% LVRs, to people investing in investment probably just because the market\u2019s going, I think, wasn\u2019t prudent. There were some things around the serviceability measures that I don\u2019t think were prudent.
\nI do think they might have over-extended a little bit of recent times because rates being so low, so if you think about all the banks servicing at 7.5% to 8% as a ballpark, but that\u2019s about where it is, I don\u2019t think any time soon we\u2019re going to be having rates back up there, but that\u2019s what lenders are now being asked to do it at by the regulators. And if they don\u2019t tack on then the regulators are just going to say, \u201cRight, you can just put more capital aside,\u201d and that\u2019s a greater cost to a bank or a lending institution than actually making a few tweaks to their servicing calculator.
\nKevin:<\/b>\u00a0 That figure you mentioned, 7.5% to 8%, that\u2019s the figure that the bank calculates whether or not you can actually service the loan. Is that right? They say, \u201cIf the interest rate were at 7.5% or 8%, could this person pay it back?\u201d Is that what you\u2019re saying?
\nAndrew:<\/b>\u00a0 Yes, correct. Absolutely. You\u2019re probably looking at most people at the moment with rates at around the low fours, 4% to 4.5%, so you\u2019re actually putting a 3% differential. Now, that\u2019s been around for a long time. It was normally about 2% or so, but as rates have been coming down, the banks have just held it at that rate, so as that gap widens, so just think about that\u2019s a 3% differential on 4.5%, it\u2019s 66% loading, that\u2019s pretty significant when you have all-time lows.
\nThat\u2019s what the regulators have concern over, that with really low interest rates, people are going to get themselves in too much debt and that\u2019s going to create a market that if and when rates do increase down the track, there might be [4:57 inaudible]<\/b> and people who are in a position that they just can\u2019t service their loans.
\nKevin:<\/b>\u00a0 Are you seeing a lot of mortgage stress at present?
\nAndrew:<\/b>\u00a0 No, I\u2019m not. I guess there are certain markets where that is the case. I\u2019m fortunate with our investor clients that I think we set them up with big buffers so that they have the equity and the capacity to be able to manage their loan, but at the same time, rates are at all-time lows, so if there is some mortgage stress out there then those clients probably shouldn\u2019t have been lent to in the first place. And that, again, is what the regulators are trying to avoid.
\nKevin:<\/b>\u00a0 Do you work on the same kinds of buffers that the banks work on? In other words, are you still calculating at 7.5% or 8%, or are you even higher?
\nAndrew:<\/b>\u00a0 No, we\u2019re bound to use those sort of figures. I work on a buffer as well as an equity buffer, so the clients have either cash or equity aside so that if and when\u2026 See, when you\u2019re buying a property or an investment property, it\u2019s about buying time; it\u2019s not actually about buying the property.
\nWhat the rates are today, you know if you\u2019re taking a loan over 30 <\/b>years, things are going to go up and down, so it\u2019s about having the time on your side so that if there are any short-term blips in the road where someone might lose their job and in between getting a new job, you need to have some equity there to make sure you can make your commitments while that\u2019s happening. Hopefully, there\u2019s enough buffer there that\u2019ll allow people to get back on their feet.
\nIn terms of servicing rates, yes, we\u2019re bound by those rates as well by the lenders. That\u2019s just the playground that we\u2019re all playing on at the moment.
\nKevin:<\/b>\u00a0 Yes, well said. Andrew Mirams there from Intuitive Finance, and an interesting look behind the scenes at how you are assessed if you\u2019re going to go for a loan.
\nAndrew, thanks for your time.
\nAndrew:<\/b>\u00a0 My pleasure, Kevin. Thank you.<\/p>\n","protected":false},"excerpt":{"rendered":"

Lots of questions coming in about what the banks are doing, where rates are headed and how much I can borrow.\u00a0 Andrew Mirams from Intuitive Finance looks at the difference between serviceability and affordability.   Transcript: Kevin:\u00a0 One word comes up time and time again…<\/p>\n","protected":false},"author":176692471,"featured_media":8244,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[32,34,10,11,13,25],"tags":[101],"class_list":["post-8243","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying-a-property-topic","category-finance-topic","category-kevin-turner-sponsored-channels","category-kevin-update","category-latest-story","category-sponsored-channels","tag-podcast"],"yoast_head":"\nServiceability vs Affordability - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/serviceability-vs-affordability\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Serviceability vs Affordability - 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