APRA proposes regulation changes to help new Home Loan customers
As the dust settles from the Coalition’s victory last weekend, our attention shifts toward the Australian Prudential Regulatory Authority (APRA). On Tuesday this week APRA released their proposal to adjust some of the rules imposed on lenders of residential home loans. These changes may help customers applying for a home loan or to refinance their existing home loan.
In December 2014, APRA introduced further restrictions on lenders in an effort to reduce excessive borrowing and ensure ‘sound residential lending standards’. This involved increasing the ‘buffer interest rate’ used when assessing a customer’s home loan application.
Currently, lenders are required to assess an applicant’s ability to repay their home loan on an increased buffer rate, rather than the actual interest rate. If the applicant’s could not afford to repay the loan on the inflated buffer rate, the loan would not be approved.
The minimum assessment rate used in a lender’s assessment (as set by APRA in 2014) is the higher of either:
- 7% or;
- 2% buffer above the actual interest rate
For example, if a customer is applying to borrow $500,000 to be repaid over 30 years with a current interest rate of 4%, the customer would be required to prove their ability to make loan repayments based on the inflated assessment rate (in this case it would be 7%).
If, however, APRA decide to remove the interest rate floor of 7% and instead require that the lender assess the loan application based on only a 2% buffer above the actual rate, the inflated assessment rate would only be 6% (4% + 2%). This would mean that the applicant would be eligible to borrow more from their lender.
Although APRA’s latest commentary on the regulation does not stipulate exactly how the rules will change, APRA Chair Wayne Byres has suggested that the current buffer rate floor of 7% is no longer appropriate based on current interest rates.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk. Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor,” Mr Byres said.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards. Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products.
"The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.”
We look forward to APRA releasing the final version of the updated regulations after a four week consultation ending on 18 June 2019.
Information sourced from: https://www.apra.gov.au/media-centre/media-releases/apra-proposes-amending-guidance-mortgage-lending