Australian mortgage lending will become a little tighter from Wednesday, with applicants needing to prove they can make repayments if interest rates jump by three per cent.
Before signing on the dotted line, mortgage applicants must demonstrate the ability to continue their repayments if interest rates spike.
The Australian Prudential Regulation Authority (APRA) today raised that ‘buffer’ by half a percentage point, making it slightly more difficult for new borrowers to take on massive debts.
A borrower seeking a mortgage at the average July 2021 interest rate of 2.32 per cent must now prove they can continue their repayments should rates rise of not 4.82 percent, but 5.32 per cent.
Regulators hope this will make borrowers less likely to take on massive leverage — a growing concern for Australia’s financial institutions, given soaring house prices and sluggish wage growth.
In a note to lenders, APRA called the tweak a “targeted and judicious action” designed to shield the mortgage lending sector against growing risks.
“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,” APRA chair Wayne Byres 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.”
APRA noted that more than 20 per cent of new lending in the June quarter went to borrowers who took on loans greater than six times their annual income.
This kind of indebtedness has caught the eye of the Reserve Bank of Australia (RBA), who last month suggested high household debt levels could threaten financial stability in the case of further economic shocks.
The nation’s financial watchdogs are concerned that if incomes fall, heavily indebted houses will be unable to make their mortgage repayments; those households would also be less likely to spend elsewhere, further weakening the economy.
The ‘buffer’ tweak “does not rule out that the other measures might be used in the future,” APRA said.
And the regulator still has changes to lenders’ interest rate floor and limits to extreme debt-to-income ratios in its macroprudential arsenal.
But APRA’s Wednesday decision does not suggest regulators are on red alert, and the organisation said the 3 per cent ‘buffer’ is expected to reduce the borrowing capacity of the average loan customer by just 5 per cent.
This wait-and-see posture was adopted by the RBA on Tuesday, when it restated the official cash rate will likely remain at 0.1 per cent until 2024.
“It is important that lending standards are maintained and that loan serviceability buffers are appropriate,” the RBA said, without signalling any further interventions.