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The Commonwealth Bank of Australia (CBA) has announced that it will be lowering its interest rate floor for mortgage serviceability assessments from 5.75 per cent to 5.40 per cent, effective from Saturday, 9 November.
The major bank added that applications submitted prior to Saturday,9 November, that have not yet been formally approved will be assessed using the new floor rate.
The 2.5 per cent interest rate buffer will remain unchanged.
A CBA spokesperson told Mortgage Business that in making the decision, CBA sought to balance its regulatory obligations with the interest of its customers and the broader economy.
“In delivering this change, we have ensured we continue to meet our regulatory commitments while remaining focused on delivering great customer outcomes and supporting the Australian economy,” the spokesperson said.
CBA joins Auwside Bank, Heritage Bank and Westpac in revising its interest rate floor twice in response to the Australian Prudential Regulation Authority’s (APRA) changes to its home lending guidance
In early July, the prudential regulator scrapped its requirement for a 7 per cent interest rate floor and raised its recommended buffer rate from a minimum of 2 per cent to 2.5 per cent.
APRA chair Wayne Byres said the regulator’s amendments were “appropriately calibrated”, stating that a serviceability floor of more than 7 per cent was “higher than necessary for ADIs to maintain sound lending standards”.
Analysts have partly attributed the rebound in home lending activity over the past few months to APRA’s changes. However, some stakeholders, including CBA CEO Matt Comyn, have downplayed the stimulatory impact of the floor rate cuts.
Mr Comyn previously stated that the changes would have a “minimal effect” on credit growth, claiming that “almost 90 per cent of borrowers don’t borrow at the maximum”.
However, CEO of the Australian Finance Group (AFG) David Bailey recently told Mortgage Business that the floor rate cuts had removed barriers to credit for borrowers that were lured into the market following the RBA’s interest rate cuts.
Mr Bailey said the floor rate cuts enabled the broking group’s network of loan writers to facilitate access to credit for borrowers that had previously been turned away by serviceability restrictions.
“Our brokers are reporting that when there was a change in interest rates, it drove a higher level of enquiry, but there were some customers who still didn’t service under the old benchmark,” he said.
“I think it’s had a role to play because those customers who initially enquired have now been activated.”
This was reflected in AFG’s financial results for the first quarter of FY2020 (1Q20), in which the group’s broker network lodged $15.7 billion in home loans, up 11 per cent on the same quarter in 2018.
[Related: Plunge in volumes ‘deliberate’ and ‘self-inflicted’: Westpac]
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