An assessment rate will influence the eligibility of anyone who intends to buy a property. It could be a residential, commercial or industrial property. Assessment rates apply to all and sundry. But do you know what an assessment rate is?
What is an assessment rate?
An assessment rate is a marginal increase in the rate of interest that lenders consider while assessing the eligibility of an applicant. Just as a person’s income is used as the starting point to deem eligibility, the assessment rate is used to be reassured that a person can keep repaying the loan if the rate of interest increases over time.
Through the term of a home loan or mortgage, rates of interest will increase and decrease. With variable rates, the only guarantee is that the rate will change. Should the rate decrease, it poses no challenges to the homeowner and one can easily pay a cheaper mortgage. If the rate increases, then it may become a little demanding.
Banks and financial institutions use the assessment rate as a buffer. They don’t need to account for reductions in the rates of interest. They want to be sure that in case the rate goes up, the borrower would still be able to pay. Typically, the assessment rate is 0.5% to more than 2%. Every bank or lender has their own approach to decide the assessment rate. Some wish to be safer than others.
How assessment rate affects you?
Let us imagine a scenario where your mortgage payments every month turn out to be a thousand dollars. This obviously factors in the interest. Now, if you consider an increase in the rate of interest. For the sake of discussion, let us take an increase of 1%. This will have a bearing on your mortgage repayments. Your instalments would increase. Most people would be able to pay a little more every month but there are many who would struggle. People who apply for home loans of substantial value given their income may already be squeezing their finances to own the home. Any further stress and they may fail to repay. Hence, if the calculations after considering the assessment rate show that you will have trouble repaying, then you may be deemed ineligible. The bank may turn down your mortgage or home loan application.