APRA’s home loan rule relaxation will allow for bigger mortgages

Close-up of an auction sign, with a "sold" sticker covering the sign.
Written by The ReReport
As seen in the Source link, written by on 2019-07-05 14:07:09


July 05, 2019 14:07:09

It will now be easier for Australia’s prospective home buyers to take out bigger mortgages.

Key points:

  • From today, banks only need to apply a 2.5pc serviceability buffer to determine whether customers can afford mortgage repayments
  • With mortgage rates at record lows, it is significantly below the 7pc minimum interest rate test that APRA mandated 4.5 years ago
  • Relaxed lending standards come amid falling house prices and expectations the RBA will cut rates again

That is because the prudential regulator has decided to relax stringent lending restrictions on banks and other financial institutions.

Effective immediately, banks no longer need to apply a “stress test” to see whether their customers can afford, at least, a 7 per cent interest rate on their residential home loan repayments.

Under the new standards, implemented by the Australian Prudential Regulation Authority (APRA) on Friday, banks will have the freedom to set their own serviceability buffers.

The only restriction is that the banks ensure borrowers can repay their loans if interest rates were at least 2.5 percentage points higher than they are currently.

With many banks now offering variable mortgage rates in the low-3s, that means many borrowers are likely to be tested at a rate below 6 per cent per annum as banks decide whether they can afford to repay their loan.

“In the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs [Australian deposit-taking institutions to maintain sound lending standards,” APRA’s chairman Wayne Byers said.

“However, with many risk factors remaining in place, such as high household debt and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors.

Looser standards ahead of more RBA cuts

APRA’s decision was the outcome of a consultation process it started in May with property market stakeholders.

The consultation attracted submissions from 26 organisations, including the Australian Banking Association (ABA), Housing Industry Association (HIA), Customer Owner Banking Association (COBA) and Property Council of Australia.

“The majority of submissions supported the direction of APRA’s proposals, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied,” the prudential regulator wrote in a statement.

The removal of the interest rate floor also comes amid falling house prices, record-low credit growth and expectations that the Reserve Bank will lower interest rates again this year.

The RBA cut Australia’s cash rate earlier this week to a record low 1 per cent. It was the second rate cut in just two months.

Since December 2014, APRA has required banks to test prospective borrowers against a 7 per cent interest rate or 2 per cent “buffer” over the loan’s current interest rate, whichever was higher, to ensure they could meet repayments in case there was a rate hike.

The regulator also asked banks to ensure borrowers were “comfortably” above these thresholds.

It meant that most banks actually tested whether customers could manage repayments if interest rates hit 7.25 per cent.

That threshold was much higher, given the rates lenders are currently charging for owner-occupier loans (with many discount variable rates currently around the 3-3.5 per cent mark).