Through the floor
Westpac announced via broker channels today that it will reduce its serviceability floor rate for mortgages by 40 basis points from 5.75 per cent to 5.35 per cent, effective September 30.
The bank was losing market share versus the other three major banks due to lower borrowing capacity, and as such this move is designed to recapture some business for Westpac (along with its subsidiaries of St. George, Bank of Melbourne, and BankSA).
Where loan applications in the pipeline have not yet been formally approved, the new floor rate will apply, noted Westpac in its communication to brokers.
Commonwealth Bank presently has a floor rate of 5¾ per cent, NAB and ANZ have respective floor rates of 5½ per cent, while Macquarie sits a little lower at 5.30 per cent.
As you can see in the stylised graphic below, this potentially increases borrowing capacity on some loans, but it's the way in which the new serviceability floor could interact with further interest rate cuts which is of note.
The floor giveth...
A few caveats, though.
With a flat buffer of 250 basis points applied to the mortgage rate, rising interest rates will one day constrain borrowing.
Moreover, lenders have often been giving with one hand and taking away with the other, such as through making offsetting tweaks to assessments of living expenses, property expenses, and rental income.
My best guess is that this will win some business for Westpac and provide support to homebuyer activity, but any flow-through to the investor cohort will only be modest.
For investors with a stock of existing interest-only debt, it's unlikely there will be a meaningful change in borrowing capacity any time soon.
Overall, this is a somewhat positive move for homebuyer activity, which should help to lift stock turnover away from 20-year lows.
Overall, this is a somewhat positive move for homebuyer activity, which should help to lift stock turnover away from 20-year lows.
