Explaining assessment rates
What are assessment rates?
Each lender has a standard variable interest rate which it will apply to its variable rate home loan products. You may assume that this is the rate your lender will use when calculating how much you can borrow, however it’s not the case.
Rather, they use an altered rate that is higher than their variable rate. This accounts for the possibility of future interest rate increases and is known as the assessment rate.
Working out assessment rates
As mentioned, each lender has a standard variable rate. It uses the cash rate of the Reserve Bank of Australia (RBA) to calculate this rate. When assessing your home loan application, your lender will add between 2% and 3% onto their standard variable rate. Your lender then uses this rate to work out your ability to make repayments.
The assessment rate covers both you and your lender in the event that the RBA’s cash rate increases. An increased cash rate leads to a higher standard variable rate, which means you pay more interest per month. Of course, you will pay less interest per month if the cash rate falls and your lender lowers their interest rate.
This extra couple of percent also provides the lender with a buffer. It ensures they can cover the costs of providing the loan, while making a profit on it as well. As such, you can think of the assessment rate as a way to protect your financial future. Your lender checks to ensure you can make your repayments, even if certain circumstances change.
Lenders don’t advertise their assessment rates, which means you can’t be aware of them before you lodge your home loan application. However, you can estimate the rate if you add 2% or 3% on top of the lender’s standard variable rate.