05 Jul Borrowing capacity changes approved
The Australian Prudential Regulation Authority (APRA) has finalised it’s recommendations and will allow lenders to make changes to the current serviceability assessments. In a letter to ADIs (Banks and lenders) issued today (5th July), APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent.
So, what does this mean? Currently applications for residential mortgages are assessed basing your proposed mortgage repayments at a minimum of 7%, with most lenders assessing at rates between 7.25% and 8%. Assessments rates will continue to be calculated at a higher rate, but the buffer will now be at 2.5% over the loans interest rate. With the majority of new loans being below 4% this lower assessment rate is expected to counter some of the recent policy changes around living expenses and existing debt calculations that have meant many potential purchasers (and refinancers) have been unable to acquire a loan due to falling short.
In the press release issued by APRA, Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Mr Byres 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. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”
The current guidelines have been in place since December 2014.
Mr Byres said: “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”
The new guidance takes effect immediately. Lenders are anticipated to make those changes in the coming weeks.
More information can be found on the consultation here: APRA Consultation