Explaining assessment rates

Explaining assessment rates

You may assume that your lender uses their standard variable rate when figuring out your borrowing strength. This isn’t true. Instead, they’ll use an assessment rate to work out how much you can borrow.
UNO home loans
UNO home loans

Each lender has a standard variable interest rate which it will apply to its variable rate home loan products. You may assume that this is the rate your lender will use when calculating how much you can borrow, however it’s not the case.

Rather, they use an altered rate that is higher than their variable rate. This accounts for the possibility of future interest rate increases and is known as the assessment rate.

Working out assessment rates

As mentioned, each lender has a standard variable rate. It uses the cash rate of the Reserve Bank of Australia (RBA) to calculate this rate. When assessing your home loan application, your lender will add between 2% and 3% onto their standard variable rate. Your lender then uses this rate to work out your ability to make repayments.

The assessment rate covers both you and your lender in the event that the RBA’s cash rate increases. An increased cash rate leads to a higher standard variable rate, which means you pay more interest per month. Of course, you will pay less interest per month if the cash rate falls and your lender lowers their interest rate.

This extra couple of percent also provides the lender with a buffer. It ensures they can cover the costs of providing the loan, while making a profit on it as well. As such, you can think of the assessment rate as a way to protect your financial future. Your lender checks to ensure you can make your repayments, even if certain circumstances change.

Lenders don’t advertise their assessment rates, which means you can’t be aware of them before you lodge your home loan application. However, you can estimate the rate if you add 2% or 3% on top of the lender’s standard variable rate.

How they affect your application

The assessment rate assumes you pay more interest than you will on your home loan. If your income doesn’t cover this extra interest, your application may fail.

The Australian Prudential Regulatory Authority (APRA) played a large role in the increased use of assessment rates. In 2014, APRA asked that all lenders apply a minimum of 2% as a buffer to the standard variable rates. Furthermore, they stated that the minimum assessment rate must be 7%.

This means any home loan application you make will be assessed under the assumption that you will pay at least 7% interest on the loan. This can cause serious issues for those who have debts. For example, investors who already have other home loans may find it very difficult to get subsequent applications approved. In fact, some lenders apply an even higher assessment rate to home loans for investors.

The good news is not all lenders use assessment rates. APRA’s mandate only affected banks and Authorised Deposit-Taking Institutions (ADIs). As such, there are several smaller lenders who don’t use assessment rates. Instead, they use their standard variable rates when working out your borrowing strength. As a result, you may have a better chance of getting your home loan application approved with a smaller lender.

What to Do Next

Assessment rates could ruin an otherwise strong home loan application, but they exist to help ensure you’re able to afford the loan down the track. For more information, speak to a uno Home Loans adviser and:

  • Find out more about variable interest rates
  • Work out if you can borrow the amount of money you need.

This information is general in nature and you should always seek professional advice when making financial decisions.

This information in this article is general only and does not take into account your individual circumstances. It should not be relied upon to make any financial decisions. uno can’t make a recommendation until we complete an assessment of your requirements and objectives and your financial position. Interest rates, and other product information included in this article, are subject to change at any time at the complete discretion of each lender.

UNO home loans
UNO home loans

* Two year fixed rate, owner occupier, P&I package loan with a maximum LVR of 70% and a loan amount >=$150k. Lender rates and products may change. We cannot suggest you remain in or switch to any loan until we complete our assessment. Fees and charges apply. ^WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rate is calculated on the basis of a loan of $150,000 over a term of 25 years. ± All loan applications are subject to uno assessment and lender approval. uno does not guarantee that it will be able to find a customer a better loan than the one they currently have or to save them money.