APRA’s Change in Mortgage Rule to Increase Borrowing Power?

mortgage rule APRA borrowing power
  • Since 2014 banks have been required to “stress test” prospective borrowers against an interest rate of 7.25%, or a 2% “buffer” on top of the loan’s actual interest rate, to ensure they could meet repayments if rates rise
  • The removal of the interest rate floor comes amid falling house prices, low credit growth, and expectations that the RBA will cut interest rates this year (currently sitting at 1.5%)
  • People taking out a new home loan would be able to borrow larger amounts

So what does this mean?

In a move that is most likely to benefit owner-occupier customers, the Australian Prudential Regulation Authority (APRA) on Tuesday proposed scrapping a rule that has meant all new mortgage customers are assessed on their ability to manage repayments with 7.25 per cent interest rates.

APRA said it was putting its 7 per cent interest rate “floor” under review, because the policy may have reached its use-by date.

The floor was introduced in late 2014 in an attempt to contain soaring house prices and surging housing investor loan growth. It has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent “buffer” over the loan’s actual interest rate.

In practice, this has meant most banks test whether customers can manage repayments if interest rates hit 7.25 per cent – which is much higher than the actual rates of less than 4 per cent being offered on many mortgages today.

APRA proposed removing the guidance that banks use an interest rate floor of 7 per cent, saying it would allow banks to set their own minimum assessment rates. At the same time, it also said would increase the “buffer” banks must add onto their actual lending rates when assessing customers from 2.25 to 2.5 per cent.

“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,” chairman Wayne Byres said.

“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards. Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products,” he said.

Bank sources said the change would affect owner-occupier customers most, because banks charge these customers lower rates than property investors, and lenders would still need to add 2.5 per cent to their advertised rates when conducting their loan assessments.

The change comes as financial markets are betting the Reserve Bank will lower official interest rates to 1.25 per cent over the coming months, and experts said APRA’s move could loosen credit availability for households.

ANZ Bank economist David Plank said the move was a “material easing in the credit constraint facing households,” which could affect the outlook for interest rates.

Mr Plank said banks would probably use some sort of interest rate floor, but was reasonable to think banks’ assessment rates would “come down some way.”

“This is an effective easing in policy settings, in our view,” Mr Plank said.

CoreLogic analyst Cameron Kusher said the change was “welcome” and could help some customers get a mortgage, but on their own they would not trigger a rebound in the housing market.

He said it would still remain tougher than in the past, because banks continued to assess customers’ living expenses more carefully, but it may slow the rate of decline in house prices.

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