"Sensible" APRA changes would boost capacity of home borrowers

The Australian Prudential Regulation Authority (APRA) has recently issued a letter to all authorised deposit-taking institutions (ADIs) to consult about its proposed guideline changes that would increase the maximum borrowing capacity of home borrowers.

APRA found that differential mortgage pricing and interest rate declines since the end of 2014 are major factors that make the 7.25% assessment rate inappropriate for the current lending environment.

Speaking about the consultation, Corelogic research analyst Cameron Kusher said, “The lending environment has changed quite a lot since that time. We have seen the reintroduction of differential mortgage pricing for owner-occupiers, investor and interest-only borrowers.

“Lenders have become much more focussed on responsible lending requirements and as a result they are asking borrowers more detailed questions about their financial positions and moved away from using the HEM Index.”  

APRA proposes the following revisions to its lending guidelines:

1. To remove the quantitative guidelines on the level of the serviceability floor rate of 7%, with APRA expecting ADIs to determine and regularly review their own floor rate, and able to choose a “prudent level based on their own portfolio mix, risk appetite and other circumstances.”
2. To maintain prudence in total serviceability assessment, APRA seeks to increase expected level of serviceability buffer from a minimum of 2% (most ADIs use 2.25%) to 2.5%.
3. For a clearer prudential guideline, APRA is looking to “remove the expectation that a prudent ADI would use a buffer “comfortably above” the proposed 2.5%.”

According to Kusher, under the proposed changes, borrowers who would have previously been assessed on their ability to repay a mortgage at a 7.25% interest rate will now be assessed on their ability to repay below 6.4%.

“The proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer. Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment,” Kusher said.

While APRA’s proposed changes are welcome and will help some borrowers access a mortgage, they will unlikely result to a housing market rebound. But still, those changes mean more people would be able to get a mortgage.  

“These proposed changes in conjunction with the uncertainty of the election now behind will potentially provide additional positives for the housing market,” Kusher said.

“Furthermore, these changes may also ease some of the urgency for official interest rate cuts by the Reserve Bank. If housing can provide some additional economic stimulus, rate cuts may be less necessary.”