Stress test ap­plied to home loan cus­tomers

The Western Star - - MONEY SAVER - SO­PHIE ELSWORTH

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.

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