APRA tightens home lending rules

The increase in the interest rate buffer applies to all new borrowers, with APRA saying the impact investors more than owner-occupiers

APRA tightens home lending rules
APRA tightens home lending rules

The banking regulator has announced tougher serviceability tests for home loans in a move they described as "targeted and judicious."

From the end of October, banks will have to test whether new borrowers can still afford their mortgage repayments if home loan interest rates rose to be 3 percentage points above their current rate.

The current serviceability test is 2.5 per cent.

APRA advised a 50 basis points increase in the serviceability buffer will reduce maximum borrowing capacity for the typical borrower by around 5 per cent.

"APRA is not seeking to target the level of housing prices," it advised.

"Rather, APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well-equipped to service their debts under a range of scenarios."

APRA chairman Wayne Byres said the move was intended to head off emerging risks noting "growing financial stability risks from residential mortgage lending."

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building," Byres noted.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income,” Mr Byres said.

APRA said the rule change was necessary because there had been a significant increase in people borrowing large amounts.

“Housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers," it said.

“In the June quarter 2021, for example, more than 20 per cent of ADIs’ new lending was to borrowers that had borrowed more than six times their pre-tax income.

“This is high by both historical and international standards, and without action, the share is likely to increase further."

APRA expects the impact of a higher serviceability buffer to be larger on investors than owner-occupiers as investors tend to borrow at higher levels of leverage.

It noted the interest rate serviceability buffer was the most appropriate tool to use.

"It acts as a cap on leverage, is relatively easy to implement, and will not have any impact on mortgage interest rates.

"APRA chose not to use an interest rate floor as a means of achieving a similar effect.

"It would also be relatively easy to implement and would not impact mortgage pricing, but would be more restrictive on owner-occupiers and have a lesser impact on investors.

"A limit on the extent of high debt-to-income borrowing would precisely target more highly indebted borrowers.

"Compared to raising the interest rate buffer, however, limits would be more operationally complex to deploy consistently, and may lead to higher interest rates for some borrowers as lenders effectively seek to ration credit to this cohort.

"On balance, it was considered raising the interest rate buffer was the preferred response on this occasion.

"It does not rule out that the other measures might be used in the future.," APRA advised.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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