Serviceability loan rate changes does not mean potential customers should borrow money

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Potential borrowers' ability to get a home loan has been made easier but experts are warning customers "not to bite off more than they can".

The banking regulator this month, the ability to pay back a loan.

Previously lenders used a minimum interest rate of 7.25 per cent to determine whether or not customer repayments with rates rose.

Lenders can now use an interest rate buffer of just 2.5 per cent over the existing loan rate, making it easier for borrowers to get larger loans.

Financial comparison website RateCity's spokeswoman Sally Tindall said the changes could result in more Australians getting their home loans approved.

However, the bank decides how much money you can borrow.

"Sit down and work out exactly how much you can afford each month, factoring in a buffer of at least 2.5 per cent, if not 3 per cent above the bank's existing rate," Ms Tindall said.

"Rates are going to rise at this time."

The Reserve Bank of Australia governor, Philip Lowe, has cut the cash rate twice in two months, dropping it to a record low of 1 per cent this month.

Borrowers should not necessarily take out a bigger loan just because they are offering it to them.
Camera IconBorrowers should not necessarily take out a bigger loan just because they are offering it to them.picture: Supplied

Both variable and fixed rate loans continue to "2" in front.

RateCity data of $ 109,000 and average weekly expenses of $ 2,000, they could have previously borrowed $ 478,000 using a serviceability rate of 7.25 per cent.

Under the new changes, using a serviceability rate of 6.5 per cent, they could borrow

an extra $ 38,000 to $ 516,000 in total.

Home Loan Experts' managing director Otto Dargan said "the bank could not afford the amount they could afford".

"The new assessment rates by banks still have a significant buffer that will protect borrowers from future rate increases," he said.

"Borrowers should always be careful and consider their budget and circumstances before rushing into a larger loan."

The Mortgage Finance Association of Australia's Chief Executive Officer, Mike Felton, said the changes could allow for stress testing and customer support for the loan that aligns with a low interest rate environment.

"This strikes the correct balance between consumer protection, allowing access to credit and guaranteeing appropriate levels of competition between lenders," he said.

sophie.elsworth@news.com.au

@sophieelsworth

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