Australians wishing to borrow to finance home purchases may soon find financing easier under a loosening of restrictions being proposed by the banking regulator.
In its latest announcement, Australia’s financial services regulator APRA says it has proposed to remove a requirement on banks and other home lenders to assess the capacity of borrowers to service their loans at a minimum interest rate of 7 percent.
Under current guidance first issued in 2014, home lenders were forced to assess the capacity of borrowers to service their loans using the higher of either an interest rate floor of 7 percent or a 2 percent buffer over the loan’s interest rate – whichever is greatest.
This effectively put a floor under the level against which banks were required to assess the capacity of borrowers to pay to the tune of 7 percent.
Under the proposed changes, however, the 7 percent floor will be removed.
Instead, home lenders will have to apply an interest rate buffer of 2.5 percent over the loan’s interest rate.
In a statement, APRA chair Wayne Byres said that the 7 percent cap had become unduly restrictive in an environment whereby interest rates are at historic lows.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” Byres said.
“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 that the merits of a single floor rate across all products have been substantially reduced.”
Byres says the changes are likely to increase maximum borrowing capacity for home buyers, and does not reduce lending standards but recognises that the 7 percent minimum requirement is not warranted given the current interest rate environment.
Property industry lobby groups welcomed the move, saying the changes would improve access to finance for home buyers.
“This is a welcome and timely move by APRA which recognises the changed circumstances in the current interest rate environment for lenders and the residential housing market,” Property Council of Australia chief executive officer Ken Morrison said.