Home buyers throughout Australia are set to enjoy easier access to credit after the national prudential regulator for the financial services industry has acted to ease guidance in regard to the serviceability assessments which banks perform on residential mortgage applications.
In letters distributed to mortgage providers, the Australian Prudential Regulatory Authority (APRA) confirmed that it would no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent.
Instead, lenders will be able to review and set their own minimum interest rate floor for use in serviceability assessments.
Lenders will, however, be required to apply a buffer of 2.5 percent over and above the loan’s interest rate when making assessments about mortgage suitability.
This is up from a buffer of 2 percent previously which was applied prior to the changes.
APRA had proposed the alterations to its guidance in May, arguing that the 7 percent requirement had been unduly restrictive in an environment in which interest rates were likely to remain at historic lows for some time.
In such an environment, the gap between the 7 percent floor imposed by APRA and the actual rates paid had become quite wide and potentially wider than need be the case, the regulator said at the time.
Having received and considered 26 submissions on the proposed changes, APRA Chairperson Wayne Byres said the regulator believed that the changes were appropriately calibrated.
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards,” Byres said, cautioning that lenders should remain vigilant and actively consider their portfolio mix and risk appetite when setting their own serviceability floors.
Property industry lobby groups welcomed the changes.
“This is a sensible decision that reflects the reality of the current interest rate environment and housing market conditions,” Property Council of Australia chief executive officer Ken Morrison said.
The current guidelines were originally introduced in December 2014 as part of a package of measures designed to reinforce residential lending standards.
Byers said the changes do not signal any reduction in the importance of sound lending practices but instead were designed to enable flexibility in a low interest rate environment.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” Byres said.
This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”