Property 101: APRA on residential mortgage underwriting standards

Over the past few years, APRA has intensified its scrutiny of the mortgage lending practices and risk profiles of Australian authorised deposit-taking institutions (ADIs).

These actions reflect the importance of housing lending within Australia’s banking system.

Steps taken by APRA have included:

• in 2011, and again in 2014, seeking assurances from the Boards of the larger ADIs that they were actively monitoring their housing lending portfolios and credit standards;
• in 2013, commencing a more detailed collection from the larger ADIs on a range of housing loan risk metrics;
• in 2014, stress-testing the 13 largest ADIs against a significant housing market downturn; and
• also in 2014, issuing a prudential practice guide on sound risk management practices for residential mortgage lending.

Finally, against a backdrop of continued heightened risk due to high house prices, high household debt, low interest rates and subdued income growth, in December 2014 APRA wrote to all ADIs outlining further steps it planned to take to reinforce sound residential mortgage lending practices. These steps — which included the establishment of benchmarks for ADIs on loan serviceability and investor lending portfolio growth — were developed following discussions with other members of the Council of Financial Regulators. 

Over the course of 2015 and into 2016, APRA has been closely monitoring ADI lending portfolios, including against these stated benchmarks.  

One key element of ADIs’ lending practices is the method by which they assess a customer’s ability to service a loan against a range of potential future circumstances. This assessment of loan serviceability is not merely a legal obligation for lenders; it is also an important, prudent risk management practice.