CBA lowers serviceability floor to accommodate lower rates

Australia’s largest bank, CBA, has announced it is reducing its serviceability floor rate from 5.40 per cent to 5.10 per cent, a move that will help some people borrow more from the bank. The change is effective Saturday 14 November.

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

Australia’s second largest bank, Westpac, dropped its serviceability floor on 9 October 2020.

RateCity.com.au research director, Sally Tindall, said Australia’s two biggest banks had now adjusted their serviceability floors in response to the ultra-low-rate environment.

“CBA realises low rates are here and they’re here to stay for the next few years. This drop to the floor rate may help some CBA applicants borrow more from the bank.” she said.

“We expect other banks to re-assess their serviceability floors in response to the low-rate environment, particularly NAB who now has the highest floor rate of the big four,” she said

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.

“It’s almost surreal to think 18 months ago, banks had to stress test people’s loans at a rate of at least 7 per cent,” she said.

“The change to allow banks to set their own floor, and the dramatic drop in mortgage rates, has given home lending a significant boost, despite the economic shake up caused by the coronavirus.

“The latest ABS lending indicator figures show new owner occupier loans are up 33.8 per cent year-on-year. That’s a pretty impressive rise considering we’re still in the middle of a global pandemic,” she said.

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