Banks use test rates to make sure that home loan applicants could cope with movements in interest rates. Photo: RNZ
Banks are lowering the test rates they use to check whether borrowers can afford home loans, and brokers expect more cuts to follow.
Banks use test rates to make sure that home loan applicants could cope with movements in interest rates. They are set higher than the rates currently being charged.
They had been about 8.95 percent, but this week two main banks cut by about 20 basis points and 25 basis points.
It comes as wholesale rates fall on the expectation that the Reserve Bank will begin cutting the official cash rate towards the end of this year.
Mortgage broker David Windler said he would expect other banks to follow.
"The impact of that depends on how much debt you're carrying. You've got to remember the test rate is applied to not only the loan you're asking for but any existing mortgage debt over the remaining term of the loan.
"If you're applying for half-a-million and you've got $1 million of existing lending you've had in place for a while, then the test rate can make a reasonable difference to your surplus, which is the difference between the loan being approved or not approved or between being able to borrow a slightly higher amount.
"On a half-million loan the change in test rate only changes the surplus by about $80, but for investors carrying portfolio debt, that difference will be more significant."
Mortgage broker Glen McLeod said it would make things a bit freer for people. He said the changes to the Credit Contracts and Consumer Finance Act regulations that took effect on Wednesday were also giving applicants more leeway.
"We don't have to go and actually show and prove the rates bill or the insurance bill and things like that."
He said as servicing rules relaxed, it would make the debt-to-income ratios more important.
He said he expected a slow shift down in servicing rates.
"I'm surprised that they've gone as early as this. They must be pretty confident with their predictions for what is going to happen with interest rates… that can only be a good thing as far as I'm concerned."
Tax cuts had also been reflected in the calculators that lenders used, he said.
"Effectively it's showing you'll have that bit of extra money available."