The Australian Prudential Regulation Authority (APRA) has increased the minimum interest rate buffer banks must use when assessing the serviceability of home loan applications.
APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least three percentage points above the loan product rate.
This compares to a buffer of 2.5 percentage points that is commonly used by authorised deposit-taking institutions (ADIs) at the moment.
Chair of APRA, Wayne Byres said the decision reflected growing financial stability risks from residential mortgage lending.
“It is supported by other members of the Council of Financial Regulators, comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission,” Mr Byres said.
“In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission.”
He described the move as “a targeted and judicious action 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,” Mr 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.”
He 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 was that housing credit growth would 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,” Mr Byres said.
