Australian home buyers may be able to borrow more as banking regulator proposes changes

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  • APRA, Australia’s banking regulator, has signalled it may relax serviceability assessments for new residential mortgage loan applications, potentially allowing home buyers to borrow more to fund the purchase of their property.
  • The regulator has proposed removing the minimum 7% floor rate that all new mortgage applications are assessed by.
  • APRA says the proposal is “not intended to signify any lessening in the importance on the maintenance of sound lending standards”.
  • The probability of RBA rate cuts in the months ahead has been scaled back marginally following the announcement.

APRA, Australia’s banking regulator, has signalled that it may relax serviceability assessments for new residential mortgage loan applications, potentially allowing home buyers to borrow more to fund their purchase property.

With mortgage interest rates in Australia already sitting at multi-decade lows, and likely to be reduced further given widespread expectations that the Reserve Bank of Australia (RBA) will cut official interest rates in the months ahead, APRA is considering removing the requirement that new borrowers are assessed on their ability to make repayments in a scenario where mortgage rates sit above 7%.

“APRA has proposed removing its guidance that [lenders] should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7%,” the regulator said in a statement.

“Instead, [lenders] would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.”

APRA is proposing that serviceability assessments from lenders incorporate an interest rate buffer of 2.5% above prevailing mortgage rates.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases — possibly unnecessarily so,” APRA Chair Wayne Byres said.

“In addition, the introduction of differential pricing in recent years — with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other — has meant that the merits of a single floor rate across all products have been substantially reduced.”

“Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor,” Byres said.

Byres said that while the combination of high house prices, low interest rates, high household debt and subdued income growth still pose risks to the outlook for the housing market, he stressed the proposed changes are “not intended” to signal a loosening in lending standards.

“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” he said.

“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7% across all products.

“The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.”

APRA’s consultation period on the proposed changes will close on 18 June, ahead of the release of updated lending guidelines shortly after.

Today’s announcement has not gone unnoticed by financial markets, especially at a time when policymakers at the RBA are focused on financial stability risks posed by the housing market.

Australian cash rate futures have trimmed the probability of the RBA cutting Australia’s cash rate by 25 basis points next month to around 63%, down from 70% prior to APRA announcement.

RBA Governor Philip Lowe is scheduled to talk later Tuesday in Brisbane, and will no doubt be asked about his views on the proposed changes and whether they may impact the bank’s assessment on the outlook for official interest rates.

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