APRA warning as lending curbs eased

Regulators loosen rules on responsible home lending but caution banks against cutting standards.

A Sydney property auction. APRA’s move is intended to ease the squeeze on home lending. Puicture: AAP

The banking regulator is warning banks not to let up on responsible lending standards, as it presses ahead with moves to loosen regulations and ease the housing credit squeeze.

Confirming moves flagged in May, the Australian Prudential Regulation Authority today told authorised deposit-taking institutions its new residential mortgage lending guidance would no longer mean that banks had to use a minimum interest rate of at least 7 per cent when assessing home loan applications.

The buffer had been in place to ensure that borrowers were able to meet repayments on higher interest rates, and banks typically added a further 25 basis points to the 7 per cent threshold.

But with falling interest rates, parts of the financial sector had called for a review of the buffer, which would also provide support for the stressed housing market.

Following the changes, authorised deposit taking institutions will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a buffer of at least 2.5 per cent over the loan’s interest rate.

Still, APRA chair Wayne Byres today urged banks to “actively consider” the risk in setting their own serviceability standards.

“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,” he 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.”

Mr Byres said banks should regularly review their standards to ensure their approach to loan serviceability remains “appropriate”.

The Property Council of Australia welcomed APRA’s decision, saying the move would benefit the economy.

“This measure was put in place almost five years ago at the height of the residential price boom. As market conditions change, so should the regulatory guidance,” said Property Council chief executive Ken Morrison.

“Today’s announcement by APRA, and passage of the big personal income tax cuts add to the positive news for the property industry, which is good for jobs, investment and housing supply for our growing nation.”

APRA said the majority of submissions made during a consultation period supported APRA’s proposals, although some had requested that APRA provide new or additional guidance on how floor rates should be set and applied.

After considering the submissions, Mr Byres said the regulator believed the amendments were 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,” he said.

“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.”

APRA’s Wayne Byres. Picture: Kym Smith

The original serviceability guidance was introduced in December 2014 as part of a measure to reinforce lending standards.

The move comes after APRA dumped its 10 per cent growth cap on investor lending and cast aside its 30 per cent limit on interest-only lending.

When APRA initially announced the changes in May, ANZ’s head of Australia economics David Plank said it represented “a material easing” in the credit constraint facing households.

“In its recent update to the market, ANZ estimated that household borrowing capacity has been reduced by about 30 per cent because of the various steps taken by the regulator over a number of years and last year’s focus on the use of HEM (Household Expenditure Method),” he said in a note to clients at the time.

“ANZ estimates that the serving rate floor was responsible for almost a third of this reduction.

“The use of a floor won’t disappear, but it seems reasonable to think it will come down some way from the current 7.25 per cent used by the major banks.”