Westpac lowers serviceability floor to accommodate for low rates

Australia’s second largest bank, Westpac, has today reduced its serviceability floor rate from 5.35 per cent to 5.05 per cent, a move that will help some people borrow more from the bank and its subsidiaries.

The serviceability floor rate is the rate banks’ stress test your loan to make sure you can meet your monthly mortgage repayments.

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.

From today, Westpac has the lowest floor rate of the big four banks.

Westpac has also announced today it is winding back its temporary COVID-19 assessment measures. This includes:

• reinstating the lenders mortgage insurance waiver for certain professions, depending on their loan-to-value ratios; and
• removing loan-to-value ratio limits for self-employed applicants and those from certain tourist postcodes.

The changes are effective Friday 9 October and apply to Westpac and its subsidiaries - St George, Bank of Melbourne, BankSA and RAMS.

RateCity.com.au research director Sally Tindall said: “The bank is letting people know – it’s open for business and wants your mortgage.

“Westpac’s decision to lower one of its key stress tests is reflective of the low rate environment we find ourselves in,” she said.

“The bank recognises low rates are here to stay.

“Dropping the floor rate down to 5.05 per cent will help some customers borrow more from the bank.

“For borderline customers it could also be the difference between getting the green light on their home loan, and having their application turn down.

“The other big banks could also re-assess their serviceability floors in the coming months as home loan rates continue to fall,” 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.

“The government is planning to wind back responsible lending laws to encourage the flow of credit, but the fact that the banks can set their own floor rate has already has made a huge difference.

“This, combined with ultra-low rates on offer, has helped facilitate a record number of new owner-occupier loans,” she said.

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