Sign of the times: CBA increases serviceability floor as property prices climb

Australia’s largest bank, CBA, is increasing its serviceability floor rate from 5.10 per cent to 5.25 per cent.

From tomorrow CBA will have the highest floor rate of the big four banks.

Banks are required by the government regulator, APRA, to make sure people can repay their loan at 2.5 per cent more than the current ongoing interest rate, or the ‘floor’ rate set by the bank – whichever is higher.

For example, a customer taking out a CBA basic variable home loan with a rate of 2.69 per cent will have their repayments stressed tested at rate of 5.19 per cent today. However, from tomorrow the bank’s increasing floor rate means it will be stress tested at 5.25 per cent.

For fixed loans, banks use the variable revert rate for this assessment.

Although this change by CBA could impact how much future home loan applicants can borrow, the bank says currently 90 per cent of customers aren’t borrowing at capacity.

RateCity.com.au research director, Sally Tindall, said this move by the Commonwealth Bank would help protect people from overstretching themselves.

“This is a prudent and responsible move that will help ensure customers can afford their repayments when rate hikes kick in,” she said.

“Families who overstretch themselves to get into an overheated property market could end up in hot water when rates go up, especially if they haven’t had a decent pay rise in that time. Banks want to avoid this situation as much as customers do.

“While this change could limit the amount some customers can borrow, it’s designed to save them from mortgage stress in years to come.

“This move by CBA comes on the back of a warning from APRA to the big banks to proactively manage risky lending fuelled by skyrocketing property prices. We expect other banks will revise their floor rates upwards in coming months,” she said.

The latest APRA statistics show Australians are increasingly taking on risky levels of debt. The value of new home loans with a debt-to-income ratio of six and over rose to $23.77 billion in March. This is an increase from 16.3 per cent to 19.1 per cent as a proportion of new lending year-on-year.

“CBA’s floor rate increase shows the bank is taking its responsible lending obligations seriously and that these obligations are important to make sure people borrow within their means,” she said.

Note: In July 2019, APRA announced banks could start setting their own floor rate, provided a buffer of 2.50 per cent is applied to their stress tests.

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