There’s currently much speculation about whether banks will reduce their test interest rates in 2020.
All banks use a test interest rate to determine how much a borrower could afford to repay. While not publicly disclosed, this rate is significantly higher than advertised interest rates or what you could expect to pay on your mortgage.
For example, rates are sitting as low as 3.39% or 3.45%, but most test interest rates are sitting at around 7.00%.
Test interest rates are higher than actual interest rates to ensure that borrowers can meet any rises in the future. Banks also use test interest rates to demonstrate that they have properly applied responsible lending steps.
What will happen if test interest rates decrease?
Lower test interest rates may allow buyers who already have a deposit to borrow more. As an example, someone who's earning around $120,000 per year could potentially borrow up to $55,000 more on the same mortgage application without doing anything differently.
Will this help more first home buyers get into the market?
Not necessarily. A lower test interest rate will likely benefit those who already qualify for lending and not those who are struggling to save a deposit.
If anything, the lower interest rates will give buyers the ability to enter a price war when looking to purchase and drive house prices upwards, potentially making it even harder for those with a lower deposit to enter the market.
Will it drive more lending?
With the official cash rate set to remain relatively steady, lower test interest rates could help to drive more lending. But, only time will tell. Watch this space.
How much can you borrow?
Work out your borrowing power and mortgage repayments with our mortgage calculator.