Apra tells lenders to raise minimum interest rate buffer

Mortgage interest rates

The Apra has told the banks it expects them to 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

Mortgage interest rates may be near their lowest in history, but people applying for a new loan will have to ensure they are capable of paying a much higher rate when they inevitably rise in the future.

Against the backdrop of national house prices rising at their fastest pace in more than 30 years and strong demand for mortgages, Australia’s banking regulator has told the nation’s lenders to increase the minimum interest rate buffer when assessing the serviceability of home loan applications.

The Australian Prudential Regulation Authority (Apra) has told the banks it expects them to 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 at present.

Apra’s decision reflects growing financial stability risks from residential mortgage lending and is supported by the other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission.

In determining its course of action, Apra also consulted with the Australian Competition and Consumer Commission.

Apra’s chair, Wayne Byres, said this was 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, Byres said in a statement on Wednesday.

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.

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 is that housing credit growth will 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, Byres said.

He said the regulators would continue to closely monitor risks in residential mortgage lending and would take further steps if necessary.

The toughened standards were foreshadowed at a meeting of the CFR last month where regulators also said Apra would do more work on possible additional measures.

The council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound, the council said.

It said Apra would also produce an information paper on its framework for implementing macroprudential policy in the next couple of months.

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