APRA Tightens Home Loan Borrowing
The move is said to counter rising risks in home lending.
The move is said to counter rising risks in home lending.
The Australian Prudential Regulation Authority (APRA) has today increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The prudential regulator says the move will reduce the maximum borrowing capacity for the typical borrower by around 5%.
APRA has written to banks telling them to increase the buffer by 0.5% from 2.5% to 3%.
The buffer is added to the interest rate of the loan and borrowers are assessed on whether they can repay with the buffer to guard against higher interest rates in the future.
APRA Chair Wayne Byres said this is a targeted and judicious action.
“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,” said Mr Byres.
It comes as housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers. In the June quarter of 2021 more than 20% of new lending was to borrowers that had loaned more than 6 times their pre-tax income – a figure that is high by historical and international standards.
“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,” Mr Byres said.
APRA decided to not use an interest rate floor as it said moving the floor would have a larger impact on owner-occupiers. The regulator had previously used a set floor until 2019 when it handed responsibility back to banks.
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