APRA tightens home loan lending policy including cost of living calculations

APRA has told banks they should make sure new borrowers can repay their debts with mortgage rates of at least 7 percent.

The foreshadowed guidelines have confirmed already widely followed practice across bank mortgage lending.

The Australian Prudential Regulation Authority updated its industry guidance to ensure banks are "prudent" in managing risks in the $1.5 trillion mortgage market.

APRA is now being more specific in demanding minimum interest rates banks must use when approving customers for home loans.

It continues the crackdown commenced in late 2014.

While the banks advertise home loan interest rates well below 4 percent for new customers, APRA said a "prudent" bank would have an internal assessment rate of at least 7 percent.

APRA is also seeking banks must "scale" their cost of living indexes according to a borrower's income.

For instance, it says that even if a borrower does not have housing costs because they live with their parents, banks should still make a "reasonable estimate" of what their housing costs would be if they had to pay for housing.

The policy also specifies the minimum "haircuts" banks should make to non-salary income.

It says banks should apply a haircut of at least 20 per cent to non-salary forms of income – including bonuses, overtime, or rent from investment properties – when they are assessing a loan application.

The Australian Prudential Regulation Authority released for consultation revisions to Prudential Practice Guide APG 223 Residential mortgage lending to incorporate measures either announced by APRA in December 2014 or communicated to authorised deposit-taking institutions (ADIs) since that time.

APRA has also released for consultation with ADIs proposed new reporting requirements for residential mortgage lending data.

APRA does not expect the revisions to APG 223 to result in material changes to existing lending practices for ADIs.

The revised APG 223 does include more detailed guidance on the following areas:

• quantitative serviceability parameters including the application of interest rate buffers and floors,
• haircuts for non-salary income such as rental income,
• treatment of interest-only loans and estimation of living expenses; and

other qualitative measures including meeting responsible lending obligations, monitoring serviceability policy overrides, and treatment of self-managed superannuation fund loans and other specific loan types.

Released on 5 November 2014, APG 223 summarises APRA’s expectations for sound residential lending practices, including guidance on addressing housing loan credit risk within an ADI’s risk management framework and applying sound loan origination criteria, verification procedures and security valuation methods, among other things. 

On 9 December 2014 APRA announced further steps to reinforce sound residential mortgage lending practices — the revisions to APG 223 incorporate the serviceability requirements that were announced in December 2014 and reflect APRA’s supervisory experience in the subsequent period.