Stress test applied to home loan customers

MORTGAGE customers are being assessed on far higher interest rates than what is advertised to make sure they can cope if rates do climb.

Interest rates on home loans are resting at historically low levels – many below 4 per cent – but lenders use rates more than double this to determine whether its safe to take on a mortgage applicant.

Financial institutions use an “assessment rate” – a buffer added on to an interest rate that is usually between 7 and 8 per cent – to decipher whether a customer could successfully meet their repayments if rates hiked to this level. New analysis by online mortgage broker channel Uno Home Loans found on a $300,000, 30-year loan the average variable rate is 4.5 per cent and monthly repayments are $1534.

But if an assessment rate of 7.25 per cent was applied, a customer would be paying $2047 per month.

Uno’s chief financial officer Jason Azzopardi said if customers increased their repayments to reflect this higher rate they could pay off a 30-year $300,000 loan in 17.9 years and save about $112,000 in interest repayments.

“It’s absolutely the best time to be paying extra, rates are at record lows and people generally have more disposable income,” he said.

The Mortgage and Finance Association of Australia’s chief executive officer Mike Felton said paying any extra now on your loan can make a huge difference to reducing your principal faster.

“If you are able to make large repayments you will significantly cut the term of your mortgage,’’ he said. “If you have a loan with a redraw facility then that money is available if you do require it later on.”

A redraw facility holds the extra payments made on your loan and can be withdrawn back without incurring charges if needed.