apra tighten belt
Pressure had been building on APRA to tighten home loan serviceability tests. Image – Canva.
  • The Australian Prudential Regulation Authority has sent a letter to all lenders announcing the changes
  • New borrowers now need to assess their loan repayments at a rate above 3% the product rate
  • One in five loans approved in June quarter were for loans over six times the borrower's income

The banking regulator has today announced tighter serviceability tests for home loans, making it harder for some borrowers to take out a mortgage.

The Australian Prudential Regulation Authority (APRA) has sent a letter to all authorised deposit-taking institutions (ADIs) advising lenders it will assess the ability of new borrower’s to meet their loan repayments at an interest rate 3% above the loan product rate.

Normally, a buffer of 2.5% is commonly used by lenders.

The decision is supported by the Council of Financial Regulators which consists of the Treasury, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA).

The news comes as the RBA decided yesterday to maintain the cash rate at 10 basis points – 0.1% – as expected.

In its traditional Monetary Policy Decision post-meeting statement, RBA Governor Dr Philip Lowe once again reiterated the fact that house prices are rising despite a decline in turnover across some markets following the virus outbreak.

“Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors,” said Dr Lowe.

He added the regulators had been discussing the medium-term risks to macroeconomic stability due to the rapid growth of credit when rates have been historically low.

“In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate,” he said.

Action reinforces stability of financial system, said APRA

Upon announcing the restrictions, APRA Chair Wayne Byres said the “targeted and judicious” action is designed to reinforce the stability of the financial system.

“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,” he 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.”

Wayne Byres, APRA Chair

Wayne Byres
APRA Chair Wayne Byres. Image – LinkedIn.

Mr Byres noted that more than one in five loans approved during the June quarter were at more than six times the income of the borrowers – a concerning statistic that has led to this decision.

“..at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead,” he added.

“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,” Mr Byres said.

UDIA expresses concern

After APRA made the announcement, the Urban Development of Institute of Australia (UDIA) said it urges regulators to take caution in “taking a heavy stick to credit availability”.

“Our industry employs over 750,000 people and contributes enormously to the economic fabric of the nation,” said UDIA National President, Simon Basheer.

“We urge financial regulators to take a cautious approach to any further intervention in housing lending, to avoid the unintended risk of choking developer finance, stifling consumer credit and housing supply and having unintended consequences on overall affordability and home ownership for thousands of Australians.”

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