With the rapid rise in home loan lending starting to worry Australian regulators, the Australian Prudential Regulation Authority (APRA) began to tighten norms for banks offering such products.
APRA raised the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications - a sort of stress test for retail borrower.
Lenders will have to assess borrowers’ ability to meet loan repayments at an interest rate that is at least three percentage points above the loan product rate as compared with a buffer of 2.5 percentage points used currently.
Debt affordability focus
“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,” APRA chair Wayne Byres said in a statement on Wednesday.
The regulator added that its decision is supported by other members of the Council of Financial Regulators, comprising the Reserve Bank of Australia (RBA), Treasury and Australian Securities and Investments Commission.
APRA expects the hike in loan serviceability buffer to reduce the maximum borrowing capacity of the typical borrower by 5%.
Measure will have "modest" impact
“Given some borrowers are already constrained by the floor rates that lenders use, and that many borrowers do not borrow at their maximum capacity, the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest,” the regulator’s statement said.
Last week, data released by the RBA showed that home loan lending in August in Australia grew at the fastest annual pace since February 2018.
After its monetary policy meeting on Tuesday, RBA Governor Philip Lowe had said in a statement that the Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of low interest rates.
He had added that the current 2.5 percentage points loan serviceability buffers were appropriate.
Economy expected to bounce back
However, according to APRA’s Byres loan serviceability buffers needed to be raised now. “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,” he said.
APRA’s statement added that it will continue to closely monitor the risks in home loan lending and take further steps if necessary.
“Further macroprudential tightening seems more likely than not. But not before the Council of Financial Regulators has had time to assess the impact of this move. APRA’s upcoming information paper on the framework it applies to macroprudential policy will be important in this context,” David Plank, head of Australian economics at Australia and New Zealand Banking Group, wrote in a note after APRA announced its decision on Wednesday.