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Regulators Boost Loan Serviceability Buffer to 3pc

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The Australian Prudential Regulation Authority has moved to tighten lending standards with an increased minimum interest rate buffer of 3 per cent.

APRA has told lenders it expects they will now assess new borrowers’ ability to meet loan repayments at an interest rate that is at least 3 percentage points above the loan’s product rate, an increase of 0.5 per cent.

The move is in response to increasing pressure on the Australian government to crack down on high-debt home loans and crippling house price inflation.

APRA’s data shows one-in-five households is borrowing up to six times their income to buy a house, which presents significant exposure for banking institutions if interest rates go up ahead of the central bank’s forecast of 2024.

In a statement APRA said the decision “reflects growing financial stability risks from [institutional lenders] residential mortgage lending, [and] is supported by other members of the Council of Financial Regulators”.

APRA chair Wayne Byres, pictured, said it was a “targeted and judicious action” that would reinforce financial stability.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on—both today and into the future,” Byres said.

“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.

“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.”

The move is to counteract the pressure on household indebtedness, which is likely to remain heightened according to APRA.

Household credit growth is expected to exceed household income growth in the near term, adding to concerns around overall household indebtedness.

It is expected that investors will be more heavily impacted by the higher serviceability buffer because they tend to borrow at higher levels of leverage and have concurrent debts.

APRA has forecast the increased buffer will reduce average borrowing capacity by about 5 per cent.

Property Council Australia chief executive Ken Morrison said he understood the rationale behind the decision to adjust home loan eligibility tests but warned it needed to be monitored closely.

“We note it will be vital for the government and the regulator to monitor the situation closely into 2022, to ensure their efforts do not sap broader market confidence during our economic recovery,” Morrison said.

“Australia’s residential housing market is worth almost $10 trillion ... fiscal stimulus and the HomeBuilder effect are withdrawing from the economy, the successful transition out of lockdown of our two largest states has yet to occur, and net overseas migration is still negative.

“Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry and this should never be taken for granted.”

ANZ head of economics David Plank said it was a “modest change” in the current context of rapidly rising house prices, and predicted more measures would be adopted in the future to tighten up lending standards.

“Further macro-prudential tightening seems more likely than not,” Plank said, “but not before the Council of Financial Regulators has had time to assess to the impact of this move.

“APRA’s upcoming information paper on the framework it applies to macro-prudential policy will be important in this context.”

Plank said the trend towards high-debt loans had been emerging during the past year, but APRA and the Council of Financial Regulators had been wary of intervening during lockdown.

“With lockdowns soon to be lifted, and expectations that the economy will bounce back, APRA considers the balance of risks has shifted such that a timely adjustment to serviceability standards is now warranted,” Plank said.

Plank said APRA would use the interest rate serviceability buffer as a cap on leverage because it was easy to implement and would not impact mortgage interest rates, targeting more heavily indebted borrowers.

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Article originally posted at: https://www.theurbandeveloper.com/articles/apra-loan-serviceability-3pc