The Sunday Times

The Australian Prudential Regulation Authority (APRA) has announced it is considering reducing the seven per cent  oor on serviceability calculations for residential mortgages, instead allowing banks to assess loans at 2.5 per cent above current rates.

Currently, APRA requires lenders to assess whether or not a consumer can afford a loan at a rate higher than what the current lending rates are so consumers can still afford the loan repayments should interest rates rise.

In a letter to authorised deposit-taking institutions (ADIs) issued earlier this week, APRA proposed amending the guidance on mortgage lending, which was originally introduced in December 2014 as part of its efforts to reinforce sound residential lending standards.

APRA Chair Wayne Byres attributed the review to evolved operating environments for ADIs since 2014.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” he said.

“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.

“With interest rates at record lows and likely to remain at historically low levels for some time, the gap between the seven 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 the merits of a single floor rate across all products have been substantially reduced.”

REIWA president Damian Collins welcomed the proposed changes to APRA’s mortgage servicing regulations.

He said implementing them would signal a huge win for Western Australia’s struggling property market.

“Our local property market has been struggling for quite some time,” Mr Collins said.

“When APRA introduced tighter lending restrictions across the country during the rise of the Sydney and Melbourne property markets, this had huge implications for local property, with fewer buyers able to enter our already subdued market.

“If these changes go ahead, this will make home loans more accessible for more people in a realistic way. A seven per cent buffer was acceptable when mortgage rates were at a similar level, but now that interest rates are much lower, and expected to drop further with two rate cuts expected by the end of the year, the serviceability calculations should reflect this.

“If APRA introduces these changes and the banks pass the expected rate cuts on to borrowers, the assessment rate will drop from approximately 7.25 per cent to around six per cent. This will open the door to many more buyers.”

UDIA Western Australia CEO Tanya Steinbeck said the current rules in place were severely impacting on people’s ability to acquire a loan, despite improved housing affordability.

“This has meant, for WA in particular, the market is struggling to recover and jobs are being lost,”she said.

“The need to reduce the benchmark has been recognised not only by those of us in the industry.

“The State Government also pinpointed the issue when they released the recent budget and the Treasurer wrote to APRA asking them to reconsider the benchmark.

“With record low interest rates and falling house prices, we need to make it less restrictive for potential buyers to get a loan and onto the property ladder.

“Of course, we still need to ensure there are stringent rules and credit checks in place, which there are, to ensure people can realistically service their loan over time.

“In conjunction with the stability the latest Federal Election outcome provides, we are hopeful this move will really help to boost the market here in WA and will have a positive flow-on effect to the rest of the economy.”

APRA will undertake a four-week consultation period, closing on June 18 2019, before releasing updated guidelines for deposit-taking institutions.