Mortgage serviceability test rates have finally dropped – You may afford to borrow more now

Mortgage serviceability test rates have finally dropped – You may afford to borrow more now

– Sharing the best financial tips so that you can be more successful with achieving your financial goals. Hi it's Connie from Prosperity Finance, thank you for watching this video. Now recently we had a lot of inquires from both first home buyer and investors. I guess it's low interest
rates fault. (laughs) They probably end up paying
less money in your mortgages than your rent and also for investors it's really easy to have your
rent cover all your outgoings, especially amongst your
payments, given such low rates. However, not everyone can get enough loan to purchase the property. Normally your borrowing capacity is due to two factors mainly, number one is the deposit requirement and that could come from cash and equity, the other side is serviceability.

Serviceability means
how much you can afford based on your total household income. Today I want to focus
on the serviceability because I have really good
news to tell you in a minute. Okay, so over the last week, we've been receiving two
very important emails, one from Bank of China,
the other from ASB, so they told us their test rates is going to reduce immediately, almost. Now, what does that test rate mean? So basically test rate
is artificial rates, the bank use when they asses
your buying capacity okay? So, for example, despite
the actual interest rate at the moment is around 2.55 but the bank actually use six or seven, the highest would be 7.25, to make sure you can pass the servicing. If you can that's fine,
they will approve your loan, if you can't then unfortunately
there will be a decline or a reduced probable amount, so that's why some people are wondering, hey, I think I worked out I can afford it based on the calculator
that I find online, I definitely can afford a
half million dollar loan, well why you say I can only borrow 300K? Well, that's probably the key difference, so test rates is really important that which drives the serviceability.

So, what is the impact as a
result of reduced test rates? So, let's use a case study, let's say Tony and his wife
and they have two kids, the wife is housewife,
she look after the family, and the husband, Tony, he work
full time as an IT expert, he's earning 115K a year, gross income, he need to pay PAYE and 3% KiwiSaver, and he get the rest of the money. Right, so they are first home buyers, they are renting for $700
a week, ouch, (laughs) so they just wondering
if they can buy a home around 1.3 mill, so that
they can stop paying for someone else mortgages,
so they come to us and we use this example to illustrate what is the impact as a
result of lower test rates, so let's have a look.

So, with for example,
ASB, let's start with ASB. Now, Tony's job income, the net job income on a monthly basis, after KiwiSaver, after PAYE, is $6,757 and they also propose to have two boarders at their new home, so they are buying a five bedroom and they want to have two boarders to help them with mortgage payments. Now ASB, only at the moment taking one and they will discount at 75%, so anyway, on a monthly basis ASB allow $488 as a boarder income. So their total monthly
net income is at $7,244. Now before you can borrow new money, you have to make sure you cover
some existing commitments, number one is your existing
home loan repayments, in this case they don't
have any existing home loan, they are first home buyers, and they don't have a credit card, but every household has living expenses.

Now, how that calculated is
based on the household income and also their family structure, how many adults, how many
kids and also the income because they believe income
does make a different, the more you earn, the more you spend, I don't know if that true or not but this is bank philosophy,
so just keep that. Now the bank also say you
also need to make sure you have at least $200 a month
to cover any emergency, okay, so we allow $200 here, so
the total expense a month is about $2,324 okay. So, their income that can
be used to repay the loan would be $4,920 so that's
basically the net income minus the net expenses on a monthly basis. So, every month they have
$4,900 to pay the loan.

Right, so under the old test
rates, they can borrow 724K, but under the new test
rates, they can borrow 782K, the difference is almost 60K, 60K yeah. Right so, over night (laughs)
they can borrow 60K more, or 58,000 to be exact, so let's have a look Bank of China option. Now, Bank of China has same job income, 'cause obviously that's
exactly what Tony received in a month, with a boarder Bank of China, to be honest they just at the same time they dropped the test rate, they also capped the border to $150, but for comparison purpose, I keep the 200 per boarder there, so they happy to take
two, and they take 100% so they don't discount, so on a monthly basis that's
how much they're getting, so the monthly net is $8,490. Right, again they need to
list their living expenses, so they are very similar
between these two banks and they also have similar
uncommitted monthly income.

bank

So, what's difference is
the income that can be used to repay the new home loan, so there's about $1,000 difference, but what I want to point out
is now under the old rate, they can borrow $989,000, under the new rate they
can borrow $1.13 million so the difference is $145,000, that's huge difference
right, before and after. So, at Bank of China, the
new test rates is effective, already taken effect from the 17th July. ASB new rates will take
effect on the 20th July, okay, so pretty much now, by
the time you watch this video, it's already in place okay.

So, what I want you to see is
it can have a huge difference in terms of serviceability, in this case 145 with Bank of China, even ASB it's 57, so it's still big. But also between banks
it's a huge different, so if you get an offer from one bank, doesn't mean you'll get
similar amount from the other, it could have a huge difference. Now I also want to point out, there's other factors that
also drive serviceability apart from the test rates. So others include your existing home loan, if you do have existing home loan the details it actually have
an impact on your future loan, for example, the current
rates are your rate payments or loan maturity dates
or principal interest or interest only payments, they do make quite a bit of difference. So, if you improve the
existing home loan structure it can have a huge impact on your future borrowing capacity as well. Now the next one is living expenses, so bank use a different living expenses for the same situation.

Last one is the boarder income,
some banks only allow one, despite you have so many bedrooms, some bank allow two, and
also some has a cap amount, some don't have a cap amount, and cap can be $150 or
$200, it's all different, so a boarder can make
some difference as well. So, that's pretty much what I want to say in terms of serviceability change, but if you could improve,
go to the right bank and then improve your existing home loan, you probably dramatically
improve your borrowing capacity. So, what are the test rates in each bank? Well, it's a secret,
I will tell you though towards the end of this video. So, before I say that, I just
want to add my own opinion, 'cause I hear a lot of people say it, oh it's getting really hard to get a loan, yes, I think after Covid-19, definitely bank has tightened
up their policy in terms of, it's really about how
stable are your incomes, let's say if you had a business and the business just
recovered from Covid-19, it's probably too early
for the bank to get comfort around your outgoing income, or if you recently had a new job, in the past if you get a three
months income from this job you'll be fine but now, yeah, it depends on what you did before and probably three months is not enough.

Also for the existing property you own, for whatever the reason you
don't have a rental income, maybe because your
family are living there, like your parents or you
friends are living there or your tenants just left, the bank may not necessarily happy to use a rental appraisal because there is really a lot of noises in the tenancy market, people are not easy to move right now and we see the rent has
reduced in some parts of the country, yeah so,
I'll say into these incomes, bank has closer look at moment, but if your income are very stable and you can prove your incomes, actually I think your borrowing
capacity are increasing at the moment, to be honest, so that's what I observe, right. So, what I want you to
take from this video is that if you're looking to borrow money to buy a property and
you find it's not enough and you know you have a
good equity or deposit, it's the serviceability,
then it's really important that you need to do the followings, firstly you need to engage
with a very experienced and responsible mortgage
advisor, as early as possible, not wait until you see a property you're looking to buy in two days, that's going to be too late.

Now, use other clients for example, when someone make an enquiry,
I actually look at the, take a holistic approach, I look at everything
and a lot of the times, I recommend they make some improvements or restructure of the existing loan, so that they could be better protection, they can move the equity
around to the bank who can lend them the money and also improve the existing loan so that allow you to borrow more and also when it come to refinance, refix, it's really important to
think about the next plan so we know how long we should fix for and if we should refinance etc. So, these things all need
to be taken into account, that's a lot of things to consider. So if you don't give us enough time, we can't really do the best job. So, the early the better okay. So that's really important. So, yeah that's probably the biggest tips I want to share with you. So, before this video
end, I will let you know what are the test rate under each bank.

Now I just pick some banks for now because you're not really
using 20 banks at the moment, so let's say ANZ, at the moment, 6.65%, ASB 6.45%, that's just the
rates I use in my example, BNZ 6.75%, Westpac 7.25%
and Bank of China 5.0%. So, you can see it range from 5% to 7.25% and I expect there will be more banks looking to reduce their test rates, so there will be more good news, okay, so stay in tune
'cause if that happens I will let you know in the first instance. So, thank you so much for watching and I will see you next time. Bye for now..

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