- The banking regulator has tightened house loan serviceability standards, making it more difficult for some clients to acquire a mortgage
- APRA tells lenders it expects they will assess new borrowers’ ability to meet loan repayments at an interest rate at least three percentage points above the loan product rate
- APRA chair Wayne Byres says this is a planned and prudent measure aimed to strengthen the financial system’s stability
- Mr Byres says more than one in five new loans approved in the June quarter were at more than six times the borrowers’ income
The banking regulator has imposed tighter serviceability requirements for home loans, making it more difficult for customers to obtain a mortgage while keeping further actions on the table.
In a letter to banks today, the Australian Prudential Regulation Authority (APRA) announced that lenders would be required to assess whether new borrowers could meet their repayments at an interest rate that was at least three percentage points higher than the actual rate on the loan.
This compares to the 2.5 percentage points buffer used today. The new buffer is expected to reduce the maximum borrowing capacity for the typical borrower by around five per cent.
Other members of the Council of Financial Regulators (CFR) including the Reserve Bank of Australia, the Treasury, and the Australian Securities and Investments Commission, endorse APRA’s decision.
APRA said itself and other CFR members would keep an eye on risks in residential mortgage lending and warned that it “can take further steps if necessary”.
The regulator said the decision recognises growing financial stability concerns from authorised deposit-taking institution (ADI) residential mortgage lending. APRA also conferred with the Australian Competition and Consumer Commission before deciding on its line of action.
According to APRA chair Wayne Byres, this is a planned and prudent measure aimed to strengthen the financial system’s stability.
“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” he said.
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”
Mr Byres said more than one in five new loans approved in the June quarter were at more than six times the borrowers’ income. This is a high level by both historical and international standards, and without action would likely increase further.
“At an aggregate level, the expectation is that housing credit growth will run ahead of household income growth in the period ahead,” he said.
“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”
The impact of a bigger serviceability buffer is expected to be greater for investors than owner-occupiers across borrower generations. This is due to the fact that, on average, investors borrow at higher levels of leverage and may have other outstanding obligations, according to APRA
First-time buyers, on the other hand, were under-represented as a proportion of borrowers borrowing a high multiple of their income because they were more restricted by the amount of their deposit, APRA said.
The action on mortgage lending criteria was not intended to affect the level of home prices, the regulatory body said.
Rather, it said its goal was to guarantee that mortgage lending was done prudently and that borrowers were well-equipped to service their obligations in a variety of circumstances.