Banks and lenders have been put on notice to assess borrowers more keenly, in a move to prevent potential serviceability issues.
The Australian Prudential Regulation Authority (APRA) this month increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
In a letter to authorised deposit-taking institutions (ADIs), APRA told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used today.
APRA’s decision, which reflects growing financial stability risks from ADIs’ residential mortgage lending, is supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission. In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission.
APRA Chair Wayne Byres said the action is designed to ensure that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future.
“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”, Byers said.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.
“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted”, he concluded.