Getting a loan in 2023 will be difficult. Here’s why

Getting a loan in 2023 is going to be harder than ever, and it’s because of assessment rates!

Assessment Rate

Interest rates have increased exponentially since 2022, leading to banks reassessing their rates. Banks have started using a buffer, which is called an assessment rate. The assessment rate is generally 2.5% to 3% higher than the official advertised rates, which has made it harder for people to qualify for loans.

The assessment rate is essentially a safety net that banks use to ensure borrowers can still pay their loans if interest rates continue to rise.

The buffer is calculated based on the interest rates at the time of loan application and the loan repayment period. For instance, if the current interest rate is 5%, the buffer rate could be as high as 7.5% or 8%.

Reduced Borrowing Power

Let’s compare a scenario where Jason a single person earning $100,000 before tax has a monthly expense of $2,200 and no dependents and no liabilities. Jason will only be able to afford a loan of $720,000 back in 2021 when the interest rate was 2.44% including the assessment rate which is 5.14%

In 2023, Jason would only be able to borrow up to $540,000 when the interest rate is 5.14% and the assessment rate is now at 8.14%. Reducing Jason’s overall borrowing capacity by almost $200,000.

Protecting Banks

This buffer rate has made it difficult for borrowers to get loans, as banks are now being more cautious with lending. The higher buffer rates mean that borrowers must meet higher requirements in order to qualify for a loan. As a result, many people may not be able to obtain the financing they need for their homes, cars, or businesses.

Given the above factors, it is advisable to obtain loans sooner rather than later. This is because interest rates are likely to continue rising, making it even more difficult to qualify for loans. By taking out loans sooner, borrowers may be able to avoid the higher buffer rates that could make it difficult for them to qualify in the future.

If you need to consult someone about your loans, speak to us at AA Finance Solutions. Our consultations are at no charge, and we will do our best to help you find a solution.