The Australian Prudential Regulation Authority (APRA) is asking banks to relax lending rules in an attempt to increase buyers’ borrowing capacity.
APRA has also dropped its quantitative guidance about the level of serviceability floor at 7%. This guidance was used previously by banks and deposit-taking institutions (ADIs) to assess home loan applications.
Wayne Byres (chairperson of APRA) stated that the operating environment for banks has changed since 2014 when the regulator introduced guidance in order to reduce the risk from over-borrowing in an environment with low rates.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” Byres said, “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.”
Also, read: APRA calls for the removal of the buffer that hinders home loan serviceability
Bryce said the introduction of differential pricing that resulted in a gap between interest rates for owner-occupiers with principal-and-interest loans and investors with interest-only loans reduced the merits of a single floor rate.
He stated however that while banks will be more able to lend, this does not mean they should abandon sound lending practices.
He stated, “It’s not a mandated uniform rate floor of 7 per cent across all products.” It’s simply recognition of the fact that the current rate environment does not warrant it.
What APRA proposes
APRA’s primary goal is to suggest three things. First, remove the loan serviceability buffer. APRA expects banks to continue setting their own floor rates and keeping them under review. ADIs can set a prudent rate based upon several factors such as risk appetite and portfolio mix.
APRA proposes a 2% increase in the serviceability buffer to 2.5%. Currently, 2.25% serves as a buffer by most ADIs. This is done in order to preserve prudence while assessing overall serviceability.
Lastly, the regulator recommended that expectations that a prudent ADI would use a buffer larger than the 2.5% suggested be dropped.
This is what it looks like for borrowers
Cameron Kusher CoreLogic Research Analyst stated that the proposed changes would be beneficial to borrowers by increasing their chances for approval for a mortgage on a home.
If a borrower applies for a mortgage with an interest rate of more than 3.9%, they would be required to pay back the mortgage at 7.25 percent. These changes would result in a 6.4% lower buffer interest rate being used to assess the borrower.
Given the current interest rate environment, the proposed APRA changes seem sensible. The expectation is that rates will fall from here and stay lower for a longer time. He stated that it has been difficult to obtain a mortgage in 2014 partly due to the serviceability assessment.
Also, read: What’s the difference between borrowing capacity and affordability?
Recent ANZ studies have shown that the servicing rate floor is the second biggest driver of decreased borrowing ability after the Household Expenditure Metric.
Kusher said that although these changes might reduce some tightening of the servicing rate floor, the ANZ Statement states that at most 70% of the reduction in borrowing capacity was not affected by these changes.
Moody’s Investors Service senior credit officer Frank Mirenzi told The Guardian that APRA’s move would help improve credit growth and increase households’ leverage.
He stated that banks have tightened their mortgage underwriting in recent years, which has decreased the risk of an excessive credit growth.
It will help to stimulate market recovery.
Kusher said that the changes won’t lead to a rebound in the housing market.
These changes could slow down declines and help to prevent a rapid bottoming of the housing market. He stated that he did not anticipate a rapid inflation of dwelling prices after the market bottoms.
Ken Morrison (CEO Property Council of Australia), said that the decision was timely in light of current market conditions.
“It is sensible that we revisit certain measures that were in force during the height of the housing sector. Different markets require different settings. Economic prosperity is dependent on stability and stability of the financial system. Therefore, it is important that lending guidelines are regularly reviewed.