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APRA increases banks’ loan serviceability expectations to counter rising risks in home lending

16 October, 2021 - 0 Comments

The Australian Prudential Regulation Authority (APRA) told banks to increase the minimum interest rate they use  when assessing a new borrower’s ability to meet their loan repayments.  The new interest rate is at least 3.0 percent above the usual loan rate.  This means that some future applicants will borrow less money.  APRA says this mortgage serviceability buffer provides an important contingency for rate rises over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses.

APRA estimates that this increase in the serviceability buffer will reduce the maximum borrowing capacity for a typical borrower by about 5%. It also expects that many borrowers will stop borrowing at their maximum capacity.

APRA says that this is necessary because the housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers.  In the June quarter 2021, more than 20 per cent of ADIs’ new lending was to borrowers that had borrowed more than 6 times their pre-tax income. 

APRA and other members of the CFR have been wary of intervening while large sections of Australia were in lockdown, and many sections of the community were under economic stress. However, 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. This step is supported by the other agencies of the CFR.

In the current circumstances, APRA considers the increased interest rate serviceability buffer is the most appropriate tool to use. It acts as a cap on leverage, is relatively easy to implement, and will not have any impact on mortgage interest rates. 

APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well-equipped to service their debts under a range of scenarios.  

The increased buffer applies to all new borrowers.

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APRA increases banks’ loan serviceability expectations to counter rising risks in home lending

The Australian Prudential Regulation Authority (APRA) told banks to increase the minimum interest rate they use when assessing a new borrower’s ability to meet their loan repayments. The new interest rate is at least 3.0 percent above the usual loan rate. This means that some future applicants will borrow less money. APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well-equipped to service their debts under a range of scenarios.