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Banks use interest rates as high as nine per cent to determine home loan serviceability


A LOW interest rate environment is simply the calm before the storm prompting lenders to drastically increase the interest rates used to determine whether customers can service their loans.

Interest rates as high as nine per cent more than double what many borrowers are now paying are being adopted by banks assessing the repayment capacity of borrowers once rates do rise.

But raising the bar on mortgage serviceability interest rates will make it harder for eager first homebuyers to get their foot on the property ladder.

Mortgage broking firm Otto Dargan said the financial regulator knows that low rates are the calm before the storm.

Every time rates have been low in the past Aussies have borrowed to the hilt and then when rates have gone back up theres been a surge in people missing their home loan repayments, he said.

Its hard to explain that to first home buyers in capital cities, they are locked out of home ownership because their bank is assessing their borrowing power using double the actual interest rate.

The financial regulator, the Australian Prudential and Regulation Authority, has revealed its crackdown on lending practices announced in December 2014 has resulted in lenders significantly shifting the interest rates used to work out if a borrower can cope with repayments should economic conditions change.

The new data released in the APRA Insight Issue used undisclosed hypothetical situations and then calculated what interest rates they would use to determine whether borrowers could meet their home loan repayments in a much higher interest rate environment.

For existing mortgage customers banks are basing ones ability to repay their loan using rates ranging anywhere from more than six per cent up to 9.2 per cent.

For new mortgage customers some lenders use rates higher than eight per cent.

Data from financial comparison website RateCity shows on a $300,000 30-year home loan the average variable rate is 4.66 per cent and the monthly repayments are $1549.

On the same loan for a three-year fixed period the average rate is 4.37 per cent and the monthly repayments are $1497.

The sites spokeswoman Sally Tindall says in the last 20 years the average standard variable rate is 7.11 per cent and using buffers of two to three cent (higher than rates around four per cent) is reasonable.

Raising the bar on mortgage approvals will make it harder for people to get their first home, she said.

But these moves are designed to limit the number of people living in mortgage stress and avoid seeing Australians being evicted from their homes should rates start to climb.

AMP chief economist Dr Shane Oliver said he expected the cash rate to fall by another 25 basis points this year to a record-low of 1.75 per cent.

Buffett defends berkshires big coke stake

WARREN Buffett has vigorously defended Berkshire Hathaway Inc’s large, longstanding investment in Coca-Cola Co, rejecting critics who say the company’s sugary drinks harm people’s health.

Speaking at Berkshires annual shareholder meeting in Nebraska on Saturday, Buffett said it seemed spurious to argue that calories from Coke alone were a significant factor in obesity levels.

Hedge fund manager William Ackman, among others, has said he would not own Coke stock.

But Buffett, 85, noted that he consumes about 700 calories of Coke a day, saying Im about one-quarter Coca-Cola, and that he had seen no evidence that switching to water and broccoli would make it easier for him to make it to age 100.

I elect to get my 2,600 or 2,700 calories a day from things that make me feel good when I eat them. Thats my sole test, he said.

I like fudge a lot. Peanut brittle. I am a very, very, very happy guy. Berkshire owns 400 million shares of Coke, about nine per cent of the company.

Berkshire Hathaway investors heading to Omaha this weekend for the company's annual meeting have enjoyed returns based on CEO Warren Buffett's decades-old rules when it comes to investing. Jeremy Miller collected letters Buffett wrote to his business partners in his new book, "Warren Buffett's Ground Rules." He discusses on Lunch Beak. Photo: Getty