More househunters are expected to soon be able to get a mortgage with the national regulatory agency APRA set to loosen its grip on lending limits for the first time in almost five years.
Househunters struggling to meet stringent borrowing rules could find some relief soon, with the Australian Prudential Regulation Authority opening talks with banks and financiers over unclamping its strict criteria that mortgages be assessed on the borrower’s ability to make payments at a rate greater than 7 per cent.
CoreLogic research analyst Cameron Kusher said it had been almost four and a half years since APRA got financiers to tighten up on lending, requiring a buffer of at least 2 per cent above the mortgage rate for all assessments.
“As a result, many lenders used an assessment rate on mortgages of 7.25 per cent,” he said.
“The lending environment has changed quite a lot since that time. We have seen the reintroduction of differential mortgage pricing for owner-occupiers, investor and interest-only borrowers.
“Lenders have become much more focused on responsible lending requirements and as a result they are asking borrowers more detailed questions about their financial positions and moved away from using the HEM Index.”
Moody’s Investors Service has also weighed in on the issue, saying any such move to loosen APRA’s grip could stem the downturn in housing prices.
Frank Mirenzi, Senior Credit Officer, Financial Institutions Groups, Moody’s Investors Service said the proposal would likely increase borrowing capacity.
“APRA’s proposal to remove the minimum 7 per cent interest rate floor that banks use in their assessment of mortgage serviceability will help support credit growth and could stem the fall in house prices.
“The proposal will likely increase borrowing capacity and potentially allow households to increase leverage. However, banks have progressively tightened mortgage underwriting practices over a number of years, which mitigates the risks of a resurgence in excessive credit growth and another house price boom.”
Mr Kusher said “if someone is offered a mortgage at 3.9 per cent, for example, they are currently being assessed on their ability to repay a mortgage at an interest rate of 7.25 per cent”.
“Of course, a mortgage is a 25 to 30 year commitment. Over that period, interest rates will fluctuate, however, now it is a low interest rate environment with low inflation and low wage growth.”
This comes amid concern that even if rates were to fall further this year, new borrowers might not be able to take out a mortgage because they wouldn’t qualify under the strict rules.
APRA is proposed removing its strict 7 per cent floor rate, but would require lenders “to choose a prudent level based on their own portfolio mix, risk appetite and other circumstances”.
Mr Kusher said the reasons detailed by APRA included the fact that low interest rates were expected to last longer than expected and lenders had introduced differential pricing for different types of mortgages,
“Under these proposed changes, if we look at the same scenario as previous, whereby someone is looking to borrow at an interest rate 3.9 per cent. This borrower would previously been assessed on their ability to repay the mortgage at an interest rate of 7.25 per cent, now they would be assessed on their ability to repay at a lower 6.4 per cent.”
Mr Kusher said the move seemed “sensible” given the current environment and the fact that rates were expected to continue to fall.
Big Four bank ANZ has told the market that the downturn in borrowing capacity was being driven mostly by HEM changes (60 per cent), servicing rate floor at 7.25 per cent (30 per cent) and income haircuts (10 per cent).